Perceptions are more impactful than facts when it comes to guns and politics. That was the common assumption investors made with gun companies when they bought up two of the more profitable gun stocks - Smith & Wesson (SWHC) and Sturm, Ruger & Co. (RGR) - as Election Day approached.
Investors bet that gun owners would buy more guns if Clinton was elected because they were afraid that the 2nd amendment would be overturned or a new assault weapons ban would be passed. Investors thought this would be an overreaction, considering the political hurdles that Clinton would need to overcome to do such a thing.
However, Trump defeated Clinton and those two gun stocks tanked. Sturm, Ruger & Company (RGR) closed at $64.40 a share on Election Day and closed at $47.50 on November 10th. That’s a 26.2% drop.
Smith & Wesson (SWHC) did not do well either. Their stock price closed at $28.45 on Election Day and fell $21.98 by November 10th. That’s a 22.7% drop.
So if you would’ve invested $10,000 in either of those companies right before Election Day, you would’ve lost between $2,270 to $2,620 in two days.
(Click or hover over the graph to see more data)
Some gun control advocates might consider this karma punishing investors who want to take advantage of (what those advocates think are) idiots, but it is an ironic trend that investors expect gun company stocks to do better under democrats. But is that necessarily true?
I pulled financial data for both those companies and found that they both earned more money under democrats. Both companies grew their rifle sales (which includes assault rifles) considerably under President Obama’s term, but considering that those weapons were illegal until 2006, it doesn’t necessarily mean he’s the reason for the surge.
There’s another factor that investors who sold their stocks after Election Day should’ve considered: mass shootings.
As you can see in the charts below, both companies saw their revenue increase when mass shootings also increased. It isn’t an exact correlation though.
(Click or hover over the graph to see more data)
This poses an ethical dilemma for investors: do you buy a stock in a company whose revenues increase when innocent people die?
Well...it depends what the actual reason is for those increased sales. When I started this little research project, I assumed like these investors did that the revenue increase was the result of 2nd amendment advocates who were worried about further regulation after mass shootings. However, I now think there might be another reason...
The interesting thing is that the revenue increase isn’t completely from assault rifles sales, which would be the weapon most likely to be banned. Handguns make up the larger portion of sales for both these companies.
I do not have enough data nor enough time to do a thorough analysis of it, but I would hypothesize that a large portion of these earnings increase are because people are buying handguns to protect themselves from mass shootings.
Gallup did a poll and found that 60% of people who buy guns do so for self-defense, followed by self-defense at 36%. The 2nd amendment was at 5%. (Respondents could give multiple answers.)
I only have a novice understanding of guns, but I would assume handguns are better suited towards self-defense. They’re easier to carry with you in public and are more discrete. While an assault rifle would undoubtedly be a useful deterrent against dangerous people trying to harm you in public, they often attract the wrong kind of attention of bystanders.
It would take far more data and far more time to analyze it to say for certain whether self-defense is the primary reason for gun sales increase, but I may not need to do that anyways. There will undoubtedly be another mass shooting and with a Republican in the White House, there is no post-shooting hysteria of 2nd amendment advocates buying guns before they’re made illegal.
I admit that is a heartbreaking way for a hypothesis to be proven right or wrong.
So if there’s an increase in gun revenue after the next few mass shootings during the next four years, we will know for certain whether it is the fear of democrats or the fear of mass shooters.
Until then, gun stock investors can get some moral leeway in investing in people’s self-defense.
One Sentence Summary 5% return on investment is the best guess I have for the stock market over the next 40 years.
Further Reading Read my ebook to see how this concept applies to your decision about college.
Explanation In my ebook, Should I Go to College?, I say the money you invest in your college tuition should have a higher expected return on investment (ROI) than the next best and safe investment, which I say is the stock market. This is mostly an intellectual exercise to get you to think about the value college should have to you, but I personally would have invested the money I saved into the stock market had I not gone to college. You are free to do the same if you are comfortable enough.
The expected rate of return I use for the stock market in my ebook is 5% (adjusted for inflation). Where did I get this number?
It is impossible to predict your investment returns in the stock market, just like it is to predict your future career earnings after college. The best thing you can do is approximate based on what data you have.
When it comes to my expected rate of return with the stock market, I use a mixture of historical trends and Jack Bogle’s (a famous and influential money manager) method.
According to Investopedia, the average historical rate of return for the S&P 500 is 7% when adjusted for inflation. I think of that as my reasonable best case scenario.
Jack Bogle’s method is a bit different. He relies on past performance, but does so using more specific measures such as:
Don’t worry. I’m going to explain what all of those are.
In my ebook, I explain that a dividend is a portion of the profits that companies pay you if you own their stock. So a dividend yield is merely:
Earnings growth is based on historical trends. This one is subject to debate, but many people would say a safe expectation is that company earnings for the overall American economy will grow 6%. Inflation is usually expected to be 2-3%, so that makes actual earnings growth to be 3-4%.
P/E ratio means price-to-earnings ratio. This shows how much money you have to invest in a stock in order to get a certain amount of earnings.
P/E is the most common formula used to value companies because of its simplicity. The lower the P/E, the more ‘bang for your buck’ you get when you invest in a stock. (Before you go out buying stocks with P/E’s of 1 or 2, read up more why it can be a misleading formula).
How does Jack Bogle, one of the most respected and honest men in the finance industry, use these variables to estimate his returns?
Using this very simple formula:
In this video interview here, he expects the overall stock market to have earnings growth to be 5% and dividends yields which are about 2% to create a 7% investment return. He expects P/E for the overall stock market to return to its long term average of 15. That is a 3% drop.
So his overall expected return prior to inflation would be 4% annually. Now the typically safe inflation rate to expect is 2-3%, so that means his expected return could be 1-2% every year.
That’s not too good. That means if you invested a $100, you would have $101 to $102 a year from now.
Now this is just his estimated return for the next decade. If you take this formula and use it over 40 years, you get a far better number.
For the P/E to return to it’s normal number of 15, it would take 0.63% off of our yearly returns over the next 40 years (which is my expected retirement date).
So 2% dividends, 3-4% earnings growth (after inflation), and taking off .63% to adjust the P/E.
Return = 2% + 3% or 4% -.63%
Your expected return would be between 4.37% and 5.37%. For a nice round even number, I just go with 5%.