3 Investing Lessons From the Election of Donald Trump

By Keith Noonan Markets Fool.com

Image source: Getty Images.

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President-elect Donald Trump ran an unprecedented campaign and overcame what at times seemed like impossible odds to deliver a stunning upset victory over Democratic candidate Hillary Clinton. The media is still abuzz about the surprising results, with no shortage of ink yet to be spilled about how the Trump campaign succeeded and what the outcome might mean for the future of politics.

While the results are interesting from a political standpoint, investors can also find worthwhile lessons in the recently concluded campaign cycle,

Be wary of echo chambers and confirmation bias

Following the election results, comedy show Saturday Night Live did a sketch suggesting that many East and West Coast residents had been living in political bubbles that caused them to write off a Trump victory as nearly impossible. With the nation's media epicenters located in Los Angeles and New York City, much of the election coverage originated from Democratic electoral strongholds, and some in the press might have been disposed to seeing what they wanted to see when it came to Trump's chances.

With Trump's odds being discounted from the outset of his candidacy, and even many traditionally conservative-leaning outlets and pundits calling Trump a dud, there wasn't much coverage that predicted the eventual result. Just days before the election, The Huffington Post's election predictor gave Clinton a 97.5% chance of victory, and even FiveThirtyEight prognosticator Nate Silver's estimation that Trump had just a 35% of winning was criticized as too high and unscientific.

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The misleading consensus on Clinton's seemingly inevitable victory has many parallels to stock market performance over the years, but the dot-com crash in the early 2000s stands out as an especially relevant comparison. Rapid growth in internet-driven business drove tech stocks to new heights, and even with pricing highs, the prevailing view among experts was that the boom was just getting started.

In 2000, networking giant Cisco reached a peak market cap of $546 billion to become the world's most valuable company, with some estimates suggesting it was on the way to a trillion-dollar valuation. Market optimism worked to create a feedback loop that fell apart when internet growth slowed, and Cisco then suffered the biggest pure-dollar valuation drop in history.

Consensus can be a dangerous thing for investors and pundits, especially when resounding agreement becomes its own justification.

It's very hard to predict how events will affect the market

Trump. Image source: ABC/ Ida Mae Astute.

While a Trump victory was presented as unlikely, many analysts suggested that such an outcome would have a devastating effect on the market. So far, the post-election performance has borne out just how hard it is to predict the effects political events will have on the price movements of equities.

Trump's victory triggered a sizable initial sell-off, but the Dow Jones Industrial Average and theS&P 500 quickly recovered, and have actually climbed to record heights in the weeks following the results. The exact reasons for the gains are unclear.

Analysis from Brookings Institute before Nov. 8 showed that Wall Street preferred a Clinton presidency, the Democratic candidate received significantly more campaign donations from the financial sector than her Republican rival, and the initial post-election plunge pointed to unease with the result. However, though the market did not get the outcome it supposedly wanted, equity prices have still climbed to new heights.

Predicting how big events will affect individual securities is a more fruitful pursuit, at least in the short term. For example, Trump's comments suggesting he would target companies such as Amazon for higher taxation and a potential antitrust suit help to explain the stock's nearly 9% slide in the first five days following his win. But investing for the short term is not a path to success.

The value of a disruptive strategy

Whether you support or oppose Trump, or land somewhere in between, it's fair to say that no presidential candidate has better embodied the mantra of disruption espoused by many tech companies. The election winner established night-and-day distinctions between himself and a crowded Republican primary field from the outset, stepped beyond the bounds of traditional electoral decorum, and railed against the media outlets that campaigns are typically eager to court. The Trump team also benefited from a revolutionary digital strategy.

In a Forbes interview, Trump's advisor and son-in-law Jared Kushner explained the advantages the campaign got from relying on social media over traditional advertising:

We weren't afraid to make changes. We weren't afraid to fail. We tried to do things very cheaply, very quickly. And if it wasn't working, we would kill it quickly. It meant making quick decisions, fixing things that were broken and scaling things that worked.

While some commentators characterized Trump's paucity of data analytics and reliance on Facebook and Twitter as laughable, the win his campaign put together now casts the critics' view as shortsighted. Social media has revolutionized content distribution and advertising, and Team Trump's extremely efficient use of online tools proved to be a vital component of its overall unconventional approach.

Breaking with accepted practices and strategies won't always work in business or in politics, but the election of Donald Trump serves as a reminder that it can sometimes yield tremendous results.

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Keith Noonan has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com, Facebook, and Twitter. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.