Tempering War Jitters
The Motley Fool By Bill Mann (TMF Otter) March 24, 2003
It should go unsaid that the coalition invasion in Iraq will alter the course of history in a substantial way. Where a tyrant with alleged weapons of mass destruction stands today, there will be... something else in his place. The outcome is not in doubt. What is in doubt is what events will take place during the military conflict. As investors try to get their bearings based upon the latest reports from the ground, we ask a simple question: Why?
In 1996, business took me to Kuwait. As it turned out, I had a free day while I was there. A free day in Kuwait may not seem like that great a deal -- sorta like a free ticket to Detroit. But I was game to make a good day of it, so I rented a car and tooled around the country.
During the tour, I came across a memorial in honor of the countries that had committed troops and resources to help liberate Kuwait from Iraq five years before. It's a bizarre little memorial, in an out-of-the way part of Kuwait City. The front is a destroyed Iraqi tank surrounded by 40 flagpoles, one for each country. Lettering in Arabic and English boldly proclaimed Kuwait's gratitude, stating, "We will never forget."
This seemed odd because the monument itself, which by deduction couldn't have been more than five years old at the time, was in disrepair. The flagpoles were empty, the facade crumbling. At least the tank was the same, because presumably it was dilapidated before it ever became part of the memorial. I recall thinking, "Wow. They've already forgotten."
Even if Kuwait's monument maintenance skills are suspect, the country has not forgotten at all. Kuwait has played a central role in the drive to remove Saddam Hussein from power. I found it interesting that when the U.S. government kept rolling out its new, improved list of the "coalition of the willing" last week, Kuwait remained absent until the weekend.
This, though Kuwait allowed hundreds of thousands of foreign troops to station in its territory for the sole purpose of invading Iraq. That's not the sign of ambivalence. Kuwait, like no other country, knows full well the terror of living in the shadow of Saddam Hussein.
No other country except Iraq, that is.
But in my mind, that memorial is emblematic. Nations and people have built monuments to battles and warriors since the beginning of time, seeking to memorialize the fact that history's path had been altered. Certainly, it seems nigh upon impossible to consider a world in which Kuwait was the 17th province of Iraq for the last 12 years. Yet without the Gulf War, that's precisely what would have happened.
Still, already more than six years ago, looking at that monument, you got the feeling that the Kuwaitis thought of the Gulf War as a historical fact -- a painful one, for sure. This is human nature. You can't live in a reality that doesn't exist.
We hear the question constantly: How should people handle their investments in time of war? My response is the same. Soon enough, this war will be a historical fact. Recognize that millions of people are analyzing how things will be affected by the outcome, and most will come to similar conclusions at the same time. In most cases, though, the conclusion of this war will have minimal economic impact on companies.
It may seem like the market should jump up or down based on the day's circumstances, but if you think about it, the market's movement is largely a psychological reaction to things that are unpredictable at their essence.
Mr. Market goes to war The war to remove Saddam from power began in earnest on Thursday. From a financial perspective, the stock, bond, and commodity markets responded in a way that I could only describe as "euphoric." The Dow jumped by more than 8.4% for the week, with broader indexes turning in similar gains. Oil prices dropped more than 30%, from $40 down as low as $26.90.
Then, today, the dollar dropped, oil jumped, and the U.S. indexes fell sharply, as Iraqi troops began to fight back. What in the world did people expect? No one in any position of authority has claimed that this would be a fast war.
On Saturday, I read an article stating investors were fleeing "safe-haven investments," while -- according to an article at the same publication-- yesterday's actions encouraged "some investors to buy safe-haven investments."
The oil market provides a prime example. Yes, we're happy that for the time being, there have been precious few wells set alight by Iraqi forces loyal to Saddam. And for the time being, the potential for rogue attacks on Saudi Arabia's oil processing facilities seems more remote. But oil prices didn't shoot up to $40 per barrel based solely on the potential for calamity in Iraq. Two other big oil producers, Venezuela and Nigeria, are undergoing their own crises, which have shut down oil production. Conditions have deteriorated, not improved, in the last week. Combined, Venezuela and Nigeria provide about 10% of the oil imported into the U.S. Prolonged interruption of these supplies could have profound effects on the economy.
As the reports from over this weekend attest in grim fashion, it's not like peace has broken out all over Iraq. Coalition forces have a great deal of work ahead of them, and the cost could be staggering.
The outcome is not in doubt. But... Peter Lynch once said that if you spend 13 minutes per year thinking about how geopolitical events will influence your investing, you've wasted at least 12 minutes. I think that dramatically overstates the case. We should probably spend approximately four minutes per year thinking about major geopolitical issues, with the war on terror and Middle Eastern security topping the list.
For example, now might not be the best time to invest in French oil and gas company Total Fina Elf (NYSE: TOT), given the potential for its loss of contracts in Iraq and the fact that its facilities in Nigeria are among those shut down at the moment.
On the other hand, it might be a perfect time to invest in Total. Maybe the stock is trading at a discount at present because it's a French company, and that just doesn't wash these days. The point is, the challenges and opportunities for Total in regard to Iraq are well known. What can't be quantified is what happens next.
Perhaps that's what drives the market batty during times of such high significance and uncertainty. We know what the outcome will be in Iraq. Saddam Hussein's government is finished. What we don't know is how it will happen, and what events, be they catastrophic or beneficial, will take place in between.
This may seem a fatalistic attitude. It's not. Companies may not operate in environments that don't presently exist. But at the same time, the economic environment as it exists today could be gone tomorrow. The investor's task is not to guess on the next economic or geopolitical event -- something even the experts are incapable of. The task is to find companies that offer the potential for economic growth over the long haul, attached to stocks where this potential for growth is not fully priced in.
We regard the events in Iraq with trepidation. Many of us (myself included) have friends and loved ones risking their lives executing the liberation of Iraq from Saddam Hussein. To those serving, the sentiments of that memorial in Kuwait are accurate. We will never forget your courage or your sacrifice.
But from an economic standpoint, it won't be long before the world is a very different place. Some believe the completion of the war will return a great deal of confidence to the American economy. Others look at the fact that companies and individuals are still in debt up to their gills and think that the "visibility" some so crave may not offer much solace.
The nature of the economy is not nostalgic in any way. We can't make things better simply by pretending it's 1999 and the bingeing is still on. And a few years from now, when the economy has righted itself (again, I don't know when, but I know that it will), we won't push ourselves into recession simply by recalling the events of early 2003.
In an economic sense, we will forget the dark days of 2003. It cannot be otherwise. Reacting to each ebb and flow of the war with Iraq, in this regard, doesn't make much sense.
Fool on.
Bill Mann (TMFOtter on the Fool discussion boards)