If anyone ever doubted how irrationality can sometimes dominate market behavior, then a quick analysis of the effect on stock prices due to the threat of war can elucidate the facts. In almost every instance of the threat of war, stock prices immediately fell in dramatic fashion. Investors often feel pessimistic and distraught at the thought of mass destruction and the potential loss of lives. They then sell stocks purely based on this outlook, which was formulated based purely on emotions.
In fact, as history shows, the best thing to do with your money during wartime is to INVEST it in stocks. As the threat turns into a reality, governments rack up an extraordinary amount of spending that cannot be financed through tax receipts. This spending ultimately leads to inflation and stocks are a great way to hedge against inflation since earnings growth and inflation growth are positively correlated. Further, many companies actually experience a boost in earnings if they're in the defense industry.
To take advantage of this, slowly average into positions over the course of many months. As long as the country your investing in is the dominant military power, the investment should play out. Of course, there is an ethical concern regarding the morality of whether one should benefit from another's harm. I don't subscribe to this camp, but many outside the industry do and even those who've made a trade like this tend to feel awful. In my opinion, whenever you make a trade you're trying to profit at someone else's expense, so why is this situation any different?
A chart of 9/11 and the subsequent months is shown below. Note the reversal of the downward spike in the following months after the attack. A similar chart can be seen after WWI, WWII, and the Korean War.
No comments:
Post a Comment