By DAVID MOON, Moon Capital
January 6, 2008
When an assassin's
attack killed Benazir Bhutto, leader of the Pakistan People's Party and
candidate for prime minister, 10 days ago, financial markets around the world
stopped and took notice. Pakistan has nuclear weapons. If
terrorists can affect the outcome of its national elections, that's scary. And
if political candidates are killing one another'
political unrest in a country that has weapons capable of destroying millions of
people at once is not a good thing. The ensuing riots add to the concern about
who is in control of the country and their weapons arsenal. That doesn't make
investors feel warm and fuzzy either.
But should you be
making investment decisions based on geopolitical events like
It is tempting,
especially at a time when there's so much uncertainty in the U.S., albeit
without the street rioting and assassinations.
however, is the result of our all-too-human habit of focusing on the most recent
events, not necessarily the most important or relevant events. In the short
term, financial markets will react to all sorts of geopolitical, geological or
even meteorological shocks, but those types of influences are fleeting and
non-predictive of long-term price behavior.
In other words,
don't bet your money based on wars.
1939 and August 1945, perhaps as many 70 million people died as a result of the
Second World War. More than 400,000 of these were U.S. citizens.
This period also included the eighth worst stock-market crash in
U.S. history, when the Dow Jones
Industrial Average declined more than 40 percent.
During the entire
war period, however, U.S. stocks returned 98 percent, or
more than 12 percent a year.
The Korean War,
although gruesome on the battlefield, was even more generous to investors.
Stocks advanced at an average annual rate of 18.85 percent from 1950 to
But don't think
that military conflict guarantees excellent investment returns. During the 11
drawn-out years of the Vietnam War, stocks managed a mere 3.91 percent a year.
It was among the worst 11-year periods for stocks during the 20th
Let's look at
another series of events, this time a seemingly perfect storm of economic and
political crises. Domestic and foreign confidence in the U.S. economy was
faltering. A credit crunch, combined with increased worldwide demand for
non-dollar-denominated investments, placed great pressure on the
U.S. economy. The president's
political capital had dwindled, even within his own party. He was accused of
being little more than a front man for big business. New York banking giant
J.P. Morgan was profiting nicely from a cozy relationship with the federal
The year was 1896 and the president was Grover Cleveland. In one month that
year, the Dow Jones Industrial Average dropped 17
But over the next
12 months, the Dow increased 72 percent. Over three years, the gain was
In each of these
cases, the external events had little or no long-term impact on stock prices.
The most influential factor on the subsequent multi-year move in stock prices
was the level of stock prices relative to corporate earnings prior to the
That is, future stock prices were a
function of the attractiveness of then-current stock
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).