There is no portfolio for existential risk - the effect of war on investments

Veteran Wall Street floor trader Art Cashin was 18 at the time of the Cuban Missile Crisis. Cashin’s father died in his last year of high school, so Cashin bypassed college and made the leap to Wall Street to help support his family. The education he received there was more about street smarts than book smarts.

One day, nearing the close of the market, rumours abounded that Russia had launched missiles and the market took a dive. One of Cashin’s mentors, Jack, a man in his 60’s, had already clocked off for the day and was to be found at a nearby bar. The young Cashin raced to the bar, shouting the news that missiles might be in the sky and he’d attempted to sell the market, but failed.

The rest of the conversation went something like this:

Jack said “Calm down kid! First buy me a drink and then sit down and listen to me.” I ordered the drink and meekly sat down.

Jack said – “Look kid, if you hear the missiles are flying, you buy them. You don’t sell them.”

“You buy them?” I said, somewhat puzzled.

“Sure you buy them!” said Jack. “Cause if you’re wrong, the trade will never clear. We’ll all be dead.”

The story’s been recounted many times over the years. Being long removed from the time it occurred, it may today seem a frivolous tale about market panic. A guy sitting in a bar, not worrying himself about nuclear conflict, but nuclear conflict was a real prospect at the time. Yet what could he do about it?

Thinking in terms of investment losses as the biggest challenge we might face if a nuclear war occurs, is ridiculous.

With the Russian invasion of Ukraine there have been analysts writing reports looking at the risks. The risk the media is keen to remind us of is the possibility of nuclear weapons being used. One analyst came up with 10%. Putin has since stated there’s no need for nuclear weapons to be used in Ukraine. Aside from anything else Putin has done, we hope he’s credible with this statement.

The whole idea of a nightmare scenario isn’t usually weighed properly by investors. People can’t necessarily envisage what might go wrong and how things will change. Quite often things are weighed in terms of “what will X mean for my portfolio?” It is a valid concern, but will a portfolio or money even be the biggest challenge anyone of us face in that type of scenario? We suspect not.

Firstly, what needs to be considered is that a massive conflict will not occur in a vacuum. Maybe Russia and NATO cause serious damage to themselves. Maybe the US is massively impacted. Europe could be a wasteland. What does China do in a situation where the US is wounded? They may go around the world picking countries off. China may sail into Sydney harbour. What happens next may not be pretty.

In that situation all sharemarkets are decimated, but it probably doesn’t matter because we all have a new boss and what we thought was our future is very different. Even if there isn’t any aggression from larger countries, trade, and the flow of goods around the world, will be massively impacted. The supply chain issues we’ve seen of late would be considered minor. Forget consumer goods, the prices of the basics such as food and energy would skyrocket, and not just double-digit inflation as we’ve seen recently.

Despite not being involved in any conflict, other countries could quickly slip into chaos. Wealth would be eviscerated, companies wiped out, unemployment quickly races into the double digits.

No need to go any further. Acknowledge these types of scenarios as the worst things that could happen. Accept that in the event of the worst, life as we know it, would be radically different. After you’ve pondered all this, dismiss these scenarios out of your mind and never think about them again.

Why?
A: They can’t be planned for; and
B: None of us invest for the worst potential outcome.

We all invest for the future because we expect there will be one, and we want to do positive things with our money. Children’s educations, improvements to our homes, better our lives, enjoy holidays, have a nest egg for retirement, leave a legacy. Investing should increase the ability to make choices. Our investments help fund the lives we want to live.

This is all based on the idea that capitalism will continue to be a cornerstone in our lives. Markets will continue to work. Humans will use their ingenuity to solve problems. Investors will benefit from that collective progress. There’s no need for a portfolio if the state of the world has us hidden in a bunker with thousands of tins of baked beans, while it’s fire and brimstone outside.

Invest for a future that’s been like the past. Never short of challenges, but one that’s always offered an ongoing path of progression and improvements to our lives.

Optimism is the only realism.