One of the most significant investment mistakes ever made in the Early Retirement Masterclass (ERM) occurred in the first training batch I conducted in 2018.
The investment process flagged Ascendas India Trust as a possible investment option for the portfolio. However, the team that did the research rejected the counter.
In 2019, the counter went up by more than 40% and could have been the top one performer in the portfolio. Still, students were leery about India’s prospects in 2019 and considered the possibility that the Narendra Modi government may lose the election the following year because it embarked on a disastrous attempt to render some denominations of their physical currency worthless. Unfortunately, the government’s move also led to suicides in the country.
Fast forward to today, no one in 2020 would have predicted the “common prosperity” drive that torpedoed the prices of tech firms in China in 2021. Those who are keeping a war chest to bargain hunt for tech stocks in 2021 have not fared any better.
I’ve seen excellent portfolios destroyed by political risk, so students are not encouraged to make an investment based on a political outcome.
But this leaves a nagging doubt in many investors’ minds.
Political risk is everywhere. Even Singapore REITs would risk a perfect storm if tax advantages were pared back by the Singapore government in 2025. Thus, investors cannot ignore or be wilfully blind to the politics of the country they invest in.
Many investors lack a fundamental investment approach that can turn political knowledge into real profit. Thus, they need to read good books to gradually cultivate their political acumen.
This article lists down three books that can help refine and improve your political acumen. Perhaps after reading them, you’ll be able to accumulate enough wisdom to avoid an investment that is not doing well or add an emerging market’s counter just before the country starts its golden age.
1) The 10 Rules of Successful Nations by Ruchir Sharma
The first book you can read is The 10 Rules of Successful Nations by Ruchir Sharma. This is a helpful primer to decide which country is likely to do well in the future, with details of their financial markets.
The book uses a reductionist approach; but we are investors, not political scientists. Sharma’s thesis is that we can predict the success of a nation by understanding its population growth, geography, politics, inequality and state power. We also need to understand a country’s investment, inflation, currency, debt and hype.
One example that I really like is the idea that good investments can lead to long-term prosperity, and there can be bad investment binges that leads to an opposite outcome. Good investments made in agriculture, manufacturing and services development can result in the steady movement of the people up the development ladder. For example, in the 1960s, Singapore was a magnet for multinationals who set up factories in the country. On the other hand, countries can make bad binges in real estate and commodities. China’s plight is catalysed mainly by loans in the real estate sector, and South America lost their developed nation status in the 1960s because it chose to focus on its commodities sector. A drop in global commodities prices will cause such nations to suffer.
Reading this book gives immediate dividends as it allows an investor to narrow down the 10 key aspects that makes a nation succeed.
2) Principles for Dealing with the Changing World Order by Ray Dalio
Once we understand the aspects that make a nation succeed, we need to learn how to connect these insights into a time series. Ray Dalio’s magisterial work gives the reader insight to determine which development stage a country is in.
Nations rise and fall in cycles. Countries like China have seen multiple cycles over the years, as its dynasties change. Civil war and conflict result in the rise of a government that can stabilise the economy and create institutions to bring more predictability to the people. This ushers in an age of prosperity that often never lasts beyond two to three generations, as stability often leads to inequality. When distrust arises between the haves and the have-nots, it eventually enters a conflict stage that allows a new cycle to take place.
Given this simple perspective, we know that Singapore has already enjoyed half a century of prosperity. One major issue we need to grapple with is figuring out how to redistribute the pie without making it smaller in size. If we fail, Singapore will begin its decline. We can also begin to understand China’s “common prosperity” drive through these same lenses. The communist government is facing problems like the “Tang Ping” or “Lie Flat movement” and has taken steps to curtail the rich because they know that chaos and revolution will result if they fail to do so. In the book, Dalio also seems to hint that America is very close to the brink of a Civil War after citizens stormed the Capitol last year.
3) Geopolitical Alpha by Marko Papic
Once you conquer the two books above, it’s time to read what expensive political consultants know and what can command huge fees by fund managers. In this book Geopolitical Alpha, Marko Papic describes political analysts’ more arcane frameworks to make granular predictions on what is likely to happen in a nation in the future.
The frameworks are harder to grasp than the previous two books, but I think it is key to refining your political savvy and generate more returns. Practical frameworks in the book include concepts like dialectic materialism, where every analysis needs to be tuned to the material. We need to ask ourselves the material constraints faced by each government in order to predict their next move. If appropriately applied to Greece during Grexit, it would predict that the Communist Party would surrender to the European Union and carry on with its austerity measures.
The most helpful framework which can be used to predict election outcomes is the Median Voter Theorem. The political party that wins will always be the party that enacts policies that appeal to the median voter. This will not bode well for the future of Malaysia, as UMNO can likely make a comeback as the median voters in Malaysia are probably rural Malays who have a lot to lose if the racial affirmative action New Economic Policy (NEP) is repealed. This is something that every investor in Malaysia will need to take into account before investing more money in the Bursa Malaysia.
Refine your political acumen in 2022
I recommend the three books listed in this article and arranged them in terms of level of difficulty. If you want to develop your skill in assessing political outcomes in 2022, these books would be a great start.
Finishing these books will not result in an instant improvement in one’s investment results. Still, it would undoubtedly help sharpen your assessment and make reading magazines such as The Economist a lot more fruitful.
If you prefer to implement a proven strategy instead of testing theories in the markets, I share how my graduates and I pick high quality dividend stocks that pay us well.