Brexit: What to Do About It?

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Michael Zhuang                              

By Michael Zhuang

Shortly, there will be a referendum in Great Britain to determine if the UK should stay in EU or should leave for good. A mere month ago, the stay vote still won by a comfortable margin. Just showing how political wind can shift, the odds are now 50/50 that the leave vote might win.

Here are some consequences I believe a leave vote would entail:

1. Copycat referendums in other EU states, and within a few years, EU might not exist.

2. London’s reputation as world financial capital on par with New York may be diminished.

3. Disruptions to trades and investments, since UK’s relationship with Europe and the rest of the world, will have to be renegotiated.

4. Pound Sterling, London stocks, and property prices might go south. Potential capital flights from the UK.

5. More volatility in global stock markets.

As an investor, what should you do about it?

Well, all of the above can be called informed speculations. They are not actionable intelligence. In other words, when it comes to investment, we should never base our decisions on speculation about future events.

There is a mountain of academic evidence that the more investors react to events, the less the returns they get from stock markets. If you don’t believe me, go read “Trading is Hazardous to Your Wealth”, by Berkeley professor Terry Odean, published in Journal of Finance in April 2000.

I know it’s the reverse of a popular belief, but I will follow this mantra “Don’t just do something, sit there!”

If it should come to pass that the market drops significantly following the Brexit vote, then we rebalance and pick up shares cheap! Who doesn’t like a big discount?




PS: As I was finishing up this article, news broke that a pro-stay MP was shot and killed by a pro-leave fanatic. The murder has the potential of shifting the political wind again!


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5 Responses

  1. Brexit

    On the eve of a fateful British EU referendum, rivals race for final votes.



  2. A Cliff Hanger

    After a very poisonous campaign, the British vote on EU ties, shapes up as a real cliffhanger.



  3. Bye-Bye,
    Good move, UK.


  4. What should you do after the “Brexit” vote?
    [28 – 1 = 27 EU members]

    Now that U.K. citizens have held their referendum and voted that the United Kingdom should leave the European Union, what’s going to happen next?

    It’s likely that this vote will have a global economic impact. But, because it may take time before the full impact is felt, there could be continued uncertainty in the financial markets; and that uncertainty could lead to volatility. So, focus on what you can control.

    Even during times of global uncertainty, I still believe in the merits of a well-diversified portfolio that includes both domestic and international assets. Making changes to your plan based on market movements could derail your efforts to reach your goals.

    Although it’s difficult during times of market volatility, I also suggest you stay focused on the things you can control: creating clear goals, developing an appropriate asset allocation, minimizing investing costs, and maintaining a long-term perspective.

    IOW: Nothing special.

    Dr. David Edward Marcinko MBA


  5. 5 Things Investors Must Consider On Brexit

    There’s been no shortage of commentary today on the impacts of the United Kingdom’s vote to leave the EU last night. Global capital markets have witnessed a profound “attitude adjustment” as the run up to the vote was dominated by institutional investor confidence in the remain vote. All kinds of volatility and price records have been set in the overnight and into this morning. From our standpoint, this represents a pretty material change in the world order and the global economy.

    Privately, we did put in place a speculative short position based on the possibility of a LEAVE vote and you can read about how to structure such a “catastrophe hedge” here. We don’t typically talk about such speculation because it is outside the scope of the valuation-based process we preach, but these kind of tools can be useful to have in your tool box in times of perceived distress.

    On Brexit, here are 5 things an IOI investor must consider in the face of this macro change / market risk increase.

    1. Stop, relax and think. I give this very same counsel to my children when faced with a problem. The media is paid to make the biggest deal possible out of any event it latches onto. Best to take a walk, think hard about what’s happening for ourselves and then come back to our investments.

    2. Look at your portfolio and think about your investments’ direct exposure to an interruption in the relationship between Britain and Europe. This is all about understanding revenue impacts for the businesses you own.

    For example, British and European banks will likely be harmed, as well as industries associated with travel and expatriate services. The going relationship of British based firms selling significantly into the EU and vice versa will change and this uncertainty should concern shareholders. Bottom line, take a hard look at what you own.

    3. Consider the implications of increased cross border trade frictions globally, as well as a stronger US dollar on your portfolio. The number and severity of populist, anti-free trade movements is growing in developed markets around the world. Frustration with perceived ineffective political leadership is causing the populous to chuck long standing associated institutions in favor of an uncertain outcome.

    In this case, it would appear the devil we don’t know is preferred to the devil we do. Increased costs from reduced trade and dollar strength are likely outcomes to check your portfolios against.

    4. Global central bank / central planning policies are beginning to fail under the weight of “human” economics and this will add further uncertainty to capital markets. Developed markets’ central banks have attempted, with some success, to step into a policy gap created by stalled political leadership. Instead of acting to reform fiscal policies that create an environment for growth, growing sovereign debt positions have constrained politicians ability to act. Low to negative interest rates here and abroad have not inspired economic recovery because our human minds are not behaving the way economic textbooks would have led policy makers to believe. Indeed we are smart enough to see that the little growth we’ve seen has come from the smoke and mirrors of debt increases vs. durable growth led by investment. Productivity growth has slowed and the businesses that drive our developed market economies are struggling to keep up margins. This weak period of expansion can best be described as “fake growth” driven by financial engineering.

    5. Understanding and applying disciplined valuation principles is more important than ever right now. As we talked about in a recent seminar (as the gravity of the Brexit decision was taking shape), understanding how a company makes money is our anchor for knowing what to do with individual investment positions and a total portfolio. Brexit will impact some companies greatly and others very little or by indirect effects on consumption. If we understand the make up of our investments’ revenue, we can immediately see which might be durably impaired and which, while the stock price falls, may have little to no durable effects. Then we adjust our holdings and exposure accordingly. Most important, we stop running around asking, “do I sell everything?”.

    So, Brexit has happened and the implications will likely be far reaching and unknowable, so as thoughtful investors, we must start by stopping, (turning off the babble box), relaxing (this can be done by working out what you think your worst case outcome is and getting comfy with that or not) and then thinking carefully about how to go forward.

    Invest Intelligently…

    Erik Kobayashi-Solomon


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