We are changing gears…

B.I.M. is looking to move from being an investment club to an investment group or even a private equity firm. With the coming change in the political climate and perhaps global investing we have look beyond the local investment community as the foundation of the group. Here are some key differences between private equity and investment group. Let us know your thoughts and how you can become a part in the comments section.

Barriers to Entry

Private equity firms invest funds from wealthy individuals, as well as large endowments and pension funds, to purchase promising companies. Most investment groups, from small investment clubs to larger corporate interests, have much lower barriers to entry. Smaller investors who see the potential in a firm can pool their money and buy into the company, while private equity funds buy the entire company in an effort to sell it at a profit at a later date.

Industry Expertise

Before they purchase a company, private equity funds often hire industry experts, usually veterans in that company’s industry, to investigate the target firm’s performance. These analysts examine fluctuations in the target’s bottom line over the recent past, as well as how it stacks up against its competitors. While many large investment groups also conduct such research, some smaller agencies may not have the time or resources to carry out due diligence procedures.

Goals and Objectives

The goal of a private equity firm is to purchase a company, invest in its growth, then turn a profit for its investors by selling the entire firm to a larger interest. An investment group also seeks to grow a company and make a profit. However, these groups may not always buy the entire company, but purchase shares (majority or minority) and see their profits through the firm’s improved operations rather than its sale.

Management Changes

When a private equity fund buys a company, they often seek to replace upper management with their own people. These new managers operate under the direction of the fund and may not share the previous management’s vision. An investment group may choose to keep the current management if they see promise in the company’s progress. The group may also have long-term goals for the company and wish to promote stability, rather than turn a quick sale.

Election and Investment Strategy

Does this sounds familiar: Your Facebook news feed has blown up with messages like “The sky is falling! If my chosen candidate doesn’t win, the markets are doomed and so are my investments!”

Elections  bring out the more emotional side of our personalities. A presidential election year, especially, can cause excitement or despair, depending on your side of the aisle.

Market returns during an election cycle tend to be lower than years immediately preceding and following an election year. That shouldn’t come as a surprise. We tend to be guided by our emotions, and the time during an election is when emotions are going to be most tied to election results. What we historically see after the fact, though, is a return to normalcy once emotions have time to settle down. History reminds us that emotional investing is not the safest approach. Successful investing begins with a plan that accounts for goals, time horizons and risk comfort levels.

The first step in planning accordingly, then, is to determine what the economy is doing right now. Eight years since the 2008 crisis, our economic situation isn’t all good, but it isn’t all bad, either. Let’s consider the pros and cons.

Some pros:

  • Oil prices are low. Oil prices may have climbed back to around $50 a barrel after falling below $27 a barrel in February, but they are still low compared to the prices of 2008, when they climbed above $140 a barrel.
  • Interest rates are low. There was some concern when the Federal Reserve raised interest rates in December, but the yield curve has remained relatively steep.
  • Valuations are not euphoric. In the 21st-century markets, bubbles seem to rise and pop with increasing regularity, but the markets of 2016 have not been characterized by such euphoria. We’re not in a situation of Alan Greenspan’s “irrational exuberance” theory, where the markets are unfairly overvalued. Market valuations right now are well within long-term averages, especially given the current rate of growth. While it appears that everything is fairly valued, even small troubles can “spook the horse” in an election year with heightened emotions.
  • Inflation is low. Inflation has remained around 1 percent through 2016, which is low.

Some cons:

  • Growth is slow. Fewer jobs have been reported so far this year than expected, and retail sales have been disappointing. The United States’ gross domestic product growth in the first quarter of 2016 was also at its lowest in two years, at a rate of 0.5 percent.
  • The first stage of the Fed tightening its rates always comes with heightened volatility. The Fed increased its rates in December. A month later the markets celebrated the new year with a bad start. The first two weeks of January were the worst for the S&P 500 Index in history, as it had a return of -4.96 percent.
  • This particular presidential cycle has produced two of the most widely disliked candidates in history. We’ve seen that election years historically post lower returns than in the years before and after an election cycle, but this year is unique in that both candidates are viewed so unfavorably. The lack of unity around each presumptive nominee means we may see further emotional instability surrounding the markets during this election cycle.

If Clinton wins, expect something similar to the markets under President Obama — more of the slow grind of policy-making. That’s not necessarily a bad thing. Clinton is more of a centrist candidate, and if the GOP retains control of Congress, it’s possible she could cooperate with a Republican Congress and balance the budget the way her husband did in the ’90s.

In case you didn’t realize it by now, Trump as president carries a lot of uncertainties. For example, he’s talked about imposing tariffs on foreign goods. But beyond all the rhetoric, this will probably translate to “more of the slow grind of policy-making.” However, Trump could wield his “art of the deal” expertise and broker some pretty popular, nonpartisan solutions. We expect many of the same scenarios and arguments, which we’ll figure out as they happen.

Here’s the key takeaway: If you invest with a long-term, balanced and consistent approach, neither presidential candidate is likely to have a dramatic effect on your investments.