In 1866, R.L. Stevenson, the renowned Scottish author, published a Gothic novella by the name of “Dr. Jekyll and Mr. Hyde.” This novella is one of the most famous pieces of English literature and narrates the intriguing duplicity of human nature. It has always fascinated me and is forever etched in my memory, even more so as I pursue my present career.
Why? Because surviving and succeeding in the world of investment management requires us to acknowledge the inherent duality within all of us. As you read on, you will realize the “link” that was missed!
War and Investments:
We are living in unique times under extraordinary circumstances. Not only have we made progress in various aspects of life, but we are also facing the unusual situation of two concurrent wars. One in the east between Russia and Ukraine, and the other in the west between Israel and Hamas. Despite all the progress and advancements, the age-old conflict over the possession of land continues. In this article, we will explore the impact of wars on money, commodities, and investments, with a predominant focus on this perspective.
Geopolitical tensions escalating into wars have consistently triggered similar reactions from investors around the world. Whenever these conflicts arise, investors typically respond by:
- Exiting stock investments.
- Turning to commodities such as crude oil, natural gas, and gold.
- Considering fixed income yields from bonds, and so forth.
It’s intriguing to witness how investors consistently follow this pattern in times of crisis. However, the questions we should be asking ourselves are:
- Is it worth panicking?
- Should we blindly follow what everyone else is doing?
Participating in Panic (PiP): Panicking is a natural response driven by anxiety and the fear of what might happen to our investments, savings, and financial plans. This fear leads to widespread selling as war clouds loom. Institutional and overseas investors often contribute to this selling, moving their funds to safer havens globally. With the interconnected global financial marketplace, money can flow in and out swiftly, resulting in sharp market crashes. This action stems from the human desire to protect, save, and limit losses.
While institutional investors tend to sell across the board and across various markets, what should retail investors do? Do we join the panic party, or do we chart a more composed course to party through the panic? Often, in an attempt to shield ourselves, we join the panic party, cashing out regardless of the price or the quality of our portfolios, with the intention of returning when the storm subsides. However, selling out of panic often results in losses. To avoid this, it’s essential to have confidence in the quality and nature of the businesses we invest in. Markets tend to rebound as quickly as they crash, as they incorporate all available information. Patience is often a better strategy than panic during times of war.
Behavior of Global Markets: A glance at how global markets behaved in February 2022, September 2001, August 1991, and even the recent October events reflects this pattern. Wars trigger panic selling, but the markets tend to discount the impact and return to their previous trends. The lesson here is that patience, not panic, is the key to successful investing during turbulent times. Markets, as we have seen, are more concerned about economic factors such as inflation, interest rates, and unemployment trends one month after the outbreak of a war. This is a far cry from the initial narrative of trillions of dollars in market capital being wiped out at the war’s onset.
Commodity Investment Strategy: During times of war, there is a common trend of flocking to commodities such as gold, crude oil, and silver as investment opportunities. When Russia’s conflict with Ukraine began, crude oil and natural gas prices surged and remained elevated for a while before normalizing. Gold and silver prices also hardened during these periods. However, it’s essential to consider the speculative nature of gold’s price increase. No country in the world is still on the gold standard, so the spike in gold prices is primarily driven by speculation.
Crude oil is another commodity that attracts investors during times of war due to its essential nature. Prices typically rise during conflicts, but they also stabilize relatively quickly as the situation is assessed.
Retail Investor Strategy: For retail investors, embracing the philosophy that “fortune favors the brave” is wise. Leveraging opportunities and adopting a realistic plan of action is essential. This involves understanding the behavior of equity and commodity markets during times of crisis. Using derivative instruments to navigate market turbulence on equities and commodities is a short-term, profitable strategy. Investors should empathize with those affected by war, but also seize the opportunities that arise in the market.
In the long term, nations at war will eventually find peace, and what is destroyed will be rebuilt. Economies expand, and growth continues. Markets will ultimately rise in the long term, but for now, it’s about “Party in the Panic.” So, be a character reminiscent of R.L. Stevenson’s novel, Dr. Jekyll and Mr. Hyde. You can sympathize with the suffering, share in the pain, and work towards healing while also capitalizing on the opportunities presented in the market. Panicking and staying away is not the answer. Our dual nature can be leveraged to make the most of these opportunities.
Conclusion: In the long term, warring nations will cease to exist, and economies will continue to expand. Markets will eventually rise. But for now, embrace “Party in the Panic,” not just “Participate in the Panic.” I caught you there, I know!
So, where’s your mask, Dr. Jekyll, or Mr. Hyde? Or have you run out of serum? (Read the novel to get the drift.)
