Another War in the Middle East Poses a Trap To Disciplined Investors

Paul Winkler: Welcome. This is “The Investor Coaching Show.” I am Paul Winkler, he’s Evan Barnard, and we are hanging out here, talking. I thought we’d be going and talking about weather today.

I wasn’t sure. It was just before we got here it was just like all you-know-what broke loose. Right? So it was a little touch and go around here, but I think we’re all right.

Evan Barnard: It was like a dust storm, slight tornado kind of feel driving through downtown earlier.

PW: A dust storm?

EB: It was really interesting.

PW: How Phoenix.

EB: I know. Yeah, very.

PW: Really. Wow. So nothing to talk about this week either, right Evan?

EB: No news is good news.

PW: No. It’s nothing going on overseas. We’re not necessarily dealing with anything over there, right? Just so much going on.

EB: Yes.

Navigating the Fog of War

PW: We talked a bit about that last week. We talked about war and how it affects stock markets. And we talked a little bit about what was just happening in general. I don’t know about you, but I had gotten so many things from friends.

EB: Oh, huh?

PW: Fake things.

EB: Oh, yes.

PW: This happened and they sent me a picture of something.

EB: Overseas, something happened here.

PW: Yeah. Something like one was an aircraft carrier that got blown up.

EB: Uh-huh.

PW: It was a friend of mine. Oh, no, that didn’t happen. And he would take it back a few minutes later.

And there’s so much misinformation. It just reminded me of, remember that documentary we did, Evan?

EB: Yes.

PW: Navigating —

EB: — The Fog of Investing. Yeah.

PW: And we talk about navigating the fog of war in there. It is so similar that with war, you just don’t really know what’s going on half the time.

EB: And that’s even dealing with the truth.

PW: Yeah.

EB: Dealing with the truth, you don’t know what’s going on a significant part of the time.

PW: Yeah.

EB: If you add the element of either AI or malicious fake news —

PW: Uh-huh.

EB: — you really muddy the waters.

PW: Oh, yeah. Yeah. And then you have so many different entities that have different interests involved.

Think about receiving faxes and saying, “Hey, you need to buy this stock now. Or you need to be doing this.” Or shows that tell you you need to be buying this or that or the other thing, or TV programs or CEOs being interviewed that would love for you to buy their stock. Or somebody that runs a company that trades in a certain asset and they would love for you to buy that asset because if you drive it up, they make money.

EB: Right.

PW: 

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If they create interest from you, they make money. 

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It’s like that whole thing that I talk about. My latest rampage has been “we make money when you make money,” or “we do well, when you do well.”

And I’m like, yeah. The very first mutual fund ever was built on that premise.

EB: Yes. 1923, right?

PW: I want to say ’14, but maybe I’m wrong.

EB: Okay.

PW: You could be right. It could be.

EB: It was MFS, right?

PW: Yes. Yeah, yeah.

EB: MFS charter fund or something.

PW: We’ll have to look that up. But that was the whole idea is that you have a management fee and if the portfolio gets larger, they’re receiving more management fees.

How Do Companies Attract Money?

PW: But you have a different way that you’re making money: to attract money. That’s the point that I’ve been making recently. If I run a mutual fund, let’s say, and I pull in $1 billion, if I grow it to $1.3 billion by growing the assets, I make more money because the management fees are higher.

EB: Right.

PW: But if I attract 300 million more, I had the same effect.

EB: Yes.

PW: So one way to put it in numbers: If I have 1 billion, I attract another 300 million.

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What is the best way to attract more money to something? Either fear works — try to scare people that the sky is falling, Chicken Little-type effect — or greed. 

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We can appeal to greed. “We’ve got this great track record.” I just remember that line I had Andrew speak that one time, “We’ve been around for 100 years and have only been bailed out by the government once.”

But that is something that you can use to attract people. And right now, what is happening, there was something I was reading earlier, it was saying this stock and these stocks, I think these are companies that are going to do really, really well.

They’re talking about defense contractors. And defense contractors went up right away when all of this stuff started to happen. It didn’t take a prognostication from some investment manager.

EB: It’s like the space shuttle exploding. When a war starts, pretty quickly, people figure out you’re going to need more bullets.

PW: Oh yeah.

EB: And Band-Aids.

PW: Exactly right. There was one thing I read, and I wasn’t going to go there right away, but I might as well. There was an article that was “Is Iran on the Brink of Another Revolution?” And I thought this was interesting.

It was talking about how “everywhere you look, there’s another expert to tell you what won’t happen — what can’t happen — in Iran. Regime change is impossible. Never mind the mass protests of January; the regime has the guns and is willing to use them.”

And there was another article totally separate from that, it was just talking about how the leaders had a plan in place. And that plan was to attack their neighboring countries to create just turmoil. That’s all they were trying to do is create turmoil. And I thought, Isn’t that fact navigating the fog of war?

Slot Machine Market Approach

PW: You go, “What do you do with that information?” And a lot of people, what they’ll do right off the bat is when it comes to investing, you have a philosophy of “markets fail.” In other words, “I think markets are inefficient that I think I can beat the market. I can maneuver and I can do things to get higher returns.”

A la, I’m using a slot machine with a handle. We use that example many times on the show.

EB: Yeah, yeah.

PW: When you have a slot machine with a handle, people prefer that over the one that has the buttons because they just feel like they’ve got more control when they’re deciding when to bring that handle back. You pull it back toward you, but when you’re going to push it back the other direction, you can control when those wheels stop spinning more.

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You feel like you can, and the reality is you are not in control.

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EB: No.

PW: It is not.

EB: And that’s heavily regulated.

PW: Yeah, exactly. You are not in control of that.

But people feel like they’re in control when they engage in, “Let me pull out of the market for a little while. Let me put more money in the market right now. Let me change my asset mix because I hear what’s going on over in Iran.”

“I hear that the Middle East is in turmoil. This could be a prolonged war, it could go on forever.” And the markets already responded based on the general consensus of all informed investors that was what was going to happen.

EB: Mm-hmm.

PW: And we don’t really know if Monday morning or even Sunday or even later on today, you’re going to have an announcement that something really big happened, and then all of a sudden, all bets are off.

EB: Mm-hmm.

PW: And that’s the way markets work.

Where Is This Going to Lead?

PW: So they were talking about in this article, this guy says, “The vast majority of people are struggling. The political system is hated over there.”

He said, “The economic system isn’t delivering. Salaries no longer meet the basic needs of life. There’s an environmental crisis — they’ve drained the water table. And now, they have an international crisis.”

“That’s putting it mildly. Every crisis you can think of, the Islamic Republic is facing. People tell me, ‘Oh, but it’s strong and stable.’”

Tongue in cheek: “Well, it can’t be that strong and stable because people are rebelling every few years, and on a scale the regime deems existential.” And he says there are regime supporters who he pegs at somewhere between 10 and 20% of the population and who “are convinced they’re going to defeat the U.S. in this war.”

They’re not going to do it. He says, “They’re just not going to do it. ” He says, “It’s not going to happen.” And he stresses humility, which I think is really interesting that he puts that in this article. “Stresses humility” because that’s an asset in short supply.

EB: Yes.

PW: When it comes down to people trying to predict what’s going to happen, “We don’t know if the regime’s going to fail.” He said, “But he doesn’t buy the claim that the protest movement was crushed for good in January.”

And the thing that he makes a point about here is, he’s talking about what is going to happen with this? Where is this going to lead? Are people going to keep fighting?

Are they going to back down? You’ve gotten through two layers of leadership so far, how many layers are left, right?

EB: It’s probably a few.

PW: Yeah, there may be. And he says, “You can’t bet on anything. You cannot bet because all those things I listed right there.”

He said, “Here’s the thing: The economic system isn’t delivering.” He said, and I can’t find the line in the article, but I’ll do it from memory. It was something to this extent.

This is the line in that article that I thought was worth bringing up. He said, “It seems like it’s inevitable that it will go on forever, until all of a sudden, it becomes inevitable that it was going to be over quickly and things were going to change hands pretty quickly.”

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So that’s the way revolutions work. After something comes about and after something takes place, we go, “Of course.” 

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And I liken it to tech stocks, right?

EB: Yeah.

PW: Of course tech stocks were overvalued, Evan.

EB: Right. Everyone could see the bubble coming or bursting.

PW: Yeah. If you looked at all the big money managers in the late ‘90s, nobody was talking about that, that it was a bubble. That talk about it being a bubble took place after that area came crumbling down.

EB: Right.

The Myths of Investing

PW: I was talking to the guys this week, and we were talking about stocks and individual stocks. I recorded this little video, and we’re playing around with putting together this video as opposed to, you know, how we have the big educational thing that’s about an hour and 15, hour and 20 minutes that we have on the website.

EB: Uh-huh.

PW: “The Myths of Investing,” and I’m breaking down the myths and just going, “Hey, this is all this stuff that you’ve been taught forever is how you invest. Figure out which companies you ought to be investing in. Really study the company, study the balance sheet, study these companies. Or better yet, find an investment manager that has done all of this work.”

“Now try to move the money around, look around at what’s going on and slide money into this area as things get a little bit uneasy, slide it over here, sit on the sidelines for a little while, buy on the dips, do that kind of thing, do those types of things.” That’s really good, good advice, right?

This is all the stuff that we hear about. “It’s tactical asset allocation.” Or, “You really need to look at the one, three and five, and the 10 year, preferably 10 year track record on a mutual fund manager.” We’ve heard that forever.

EB: Right.

PW: 

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Yet it’s bad, terrible, terrible advice. And what we do is we go through and break it down. 

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Then we go, “Okay, that’s not how stuff works. This is how stuff works.”

So I decided I was going to do this little short video, just breaking down some of this stuff. And I’m walking through some things, just off the top of my head riffing.

And one of the things that I decided to riff on is something I hadn’t thought about in years. But there was a guy that did a presentation. He was the PowerPoint king before PowerPoint was cool.

EB: Okay.

PW: Wes Wellington.

EB: Oh yeah.

PW: Yeah. So this guy was just brilliant and he was just the king of the PowerPoint. And he would talk about all this academic stuff that we talk about. And he would have these great PowerPoint examples to back everything up.

So he comes up and he says, “When you’re looking at a company, you’re thinking about investing in a company, what do you think about?” Oh, this company’s great. I think that they’re wonderful. 

The future’s so bright. I’m wearing shades. I think everything’s great.

And he goes, “RCA, future of the country. Radio.”

We Think We Know the Future

PW: I brought that example up so many times in meetings this week that Scott in here, he’s like, “I’m going to go do some research on this.” So he goes and pulls up RCA. And I said it was the future.

Here we are on radio, and radio is still going strong in America. Go figure. A company that was the pioneer should surely benefit — just as Nvidia should surely benefit from AI, as somebody brought up this week.

So he looks it up and Scott says to me, “You know how much RCA went down when it went down?” And this is just before radio became really, really big. Just before it became really, really big, what that stock went down.

Now it went up in anticipation of radio being big, just like how companies that are doing technology became big with AI. Take a stab at it. Evan, what do you think?

EB: I’ll go with 70%.

PW: That would be a reasonable number. Would you believe it was 98%?

EB: Wow.

PW: Is that not unreal?

EB: That’s like that junk bond fund in the 529 plan or something.

PW: It’s even worse. But that just floored me.

EB: Wow.

PW: And we’ve got to talk about this.

EB: That’s like GE.

PW: Yeah.

EB: Went from whatever 60 to six or whatever. Just 90 plus.

PW: And GE wasn’t quite that bad, but GE was pretty major. Yeah, for sure. It was like $53 a share down to $7 or something like that.

But it was just one of those things that you don’t see coming. Because you think the future of this country is whatever this company is providing.

And what we do as investors is we think that we just got it going. We know what’s going to happen, where things are going to go. And the investment community, investment advisors get that in their head.

And then after it happens, back to this article. After it happens, it seems obvious that it was going to happen.

EB: Yeah.

PW: And I just thought that that was so good.

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A revolution is only obvious after it occurs.

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EB: Yes.

PW: And you have so many voices out there saying that “this is going to go on forever. It’s going to be terrible. We’re getting into a quagmire. Other countries are getting brought in and that’s the plan is to cause chaos there.”

“Oil prices are spiking right now. Look around at the gas pumps.”

Did you see that there was a … I sent Nick a chart earlier. It was gas prices, and it was just showing the gas prices, gas prices then, straight up. Because he was talking about what he saw at the pump.

EB: I paid $2.79 on the way over here at BJ’s. That’s like 70 cents higher than I was paying.

PW: Okay. About 70 cents higher. Okay. All right.

“It’s going to be going on forever. And this is going to be inflationary.” I’m hearing talk about how this is going to be inflationary.

I’m like, come on, guys. We’re seven days, eight days into something and you’re already making the comment that you know exactly where this is all leading and what’s going to happen.

EB: It’s like waving red meat in front of a dog. They can’t avoid making a prediction out of whatever’s happening. They just can’t stop themselves.

PW: Oh, totally. Yeah, it is hard. It is hard to just say, “Okay, I can’t do this.”

Looking at History of Markets During War

PW: So you asked me about war stuff.

EB: I did.

PW: What did you say? You said that there was more about that, and you had done some research?

EB: Yeah. I have no social life.

PW: Good.

EB: We’ve been in this conflict now for seven days. And I’ll call that conflict, it’s a war, whatever.

But I was looking at some of the history, some of it from workshops we’ve done in the past, and then I did just some current research this morning. And look at World War II, for example. And if you’re listening to headlines, we lost between 35 million and 60 million people in World War II. That’s worldwide, not just the U.S.

PW: Thirty-five to 65.

EB: Thirty-five to 60 million people.

PW: Sixty million. I remember 51. Was it Korea that was 53 or something like that?

EB: I’m talking about millions of people.

PW: No, interesting. I know. Oh, 51,000.

EB: ’50 to ’53 was the Korean War.

PW: Yes.

EB: 1950 to ’53.

PW: Yeah, yeah, yeah, yeah. But I’m thinking about how many people we lost. I can’t remember.

EB: I may have that number in a second.

PW: Anyway, go ahead.

EB: Thirty countries involved, Japanese economy devastated, 39 million deaths in Europe alone. And so you hear that and think, Wow. The world is ending.

PW: Oh, sure.

EB: And yet, $100,000 that was invested at the start of World War II —

PW: Thirty-seven?

EB: We’re calling 37. Yes.

PW: Okay.

EB: By December of 1945, the S&P 500 had gone up 67%.

PW: Okay. Sixty-seven, okay. All right.

EB: Through World War II, large value had gone up 140%.

PW: One hundred forty? Wow.

EB: Microcap went up 284%.

PW: Really? So really, really small companies.

EB:

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Small value was up 241% during World War II.

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PW: Two hundred forty-one percent?

EB: Right.

PW: Wow.

EB: So you talk about these predictions, and I’ll go through some of these other wars, but okay. “I know for certain the war is coming, so I’m going to go to cash.”

PW: Yes.

EB: “And then when the war is over, I’m going to invest.”

PW: “Then I’ll do it. When everything looks okay. Yeah. And the sky is clear.”

EB: And you missed 231% of return.

PW: Yeah, for sure.

This Is Nothing New

EB: Korean War, 1950 to 1953, more than 40 countries involved of all the troops sent to South Korea.

PW: That many countries. Okay. All right.

EB: About 90% were from the U.S. So from January 1948 to December 1953, the S&P 500 was up 148%.

PW: Wow.

EB: Small value was up 100%. Well, the lowest performance was 81% up for microcap, but that’s only over seven years.

PW: That’s amazing.

EB: That’s still like 10% a year.

PW: Wow.

EB: The Vietnam War went on. That’s a long war. “Oh, when are we going to get out? It’s never going to end,” until it’s ending. And we have helicopters leaving the top of the embassy.

PW: Sure.

EB: From 1952 — and that’s kind of an early start, but that’s where some of the hostilities were, but long before we had gotten involved — to ’75, S&P 500 was up 800%.

PW: Oh, how interesting.

EB: From ’52 to ’75.

PW: I like that you chose ’75, because you had in there, folks, a huge downturn.

EB: Huge decline.

PW: Downturn in ’73 and ’74.

EB: Right.

PW: So we’re not cherry-picking years there. You’re talking about a period of time that after a huge decline, even with that decline, you still had that much.

EB: Right. Large value was of 1,900%. Over that time.

I mean, so the Gulf War, it’s the same story. And even if we look at Russia, Ukraine, if we look at more recent history, the official “start,” let’s say, of the Ukraine war, is February 1, 2022. And this is just through today, because that conflict hasn’t ended.

PW: Yeah.

EB:

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But basically, the Dow at the start of that war was 33,892. And yesterday, it was 47,501.55. So that’s still up about 30%, let’s say, since ’22.

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PW: Yeah. Without dividends.

EB: Yeah.

PW: I mean, because when you’re looking at a down number, you’re not doing …

EB: The Hamas War, same kind of story, 33,000 to 47,000, and that’s in three years. So this is nothing new, and the market can deal with that.

How Companies Adjust To War

EB: There’s just been tons of interesting stories, probably don’t have time in this particular segment, but it’s been a great example of how companies adjust in the face of war. And not just defense contractors, the people you would think, okay, the healthcare maybe.

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They will figure out a way to stay profitable and hedge their bets.

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PW: Well, they have to. That’s the reason that they’re there.

EB: Right. Yeah.

PW: So if back in World War II, if we couldn’t produce cars, we moved over to tanks and airplanes and those types of things, but the whole industry changed in general. And then people came together, and they said, “Okay, we can’t do this. We need to …”

They began rationing of different things to make sure that we had enough materials for the war, and everybody got together. And companies, of course, had to do something to keep going and producing new things.

And it was interesting because Madison Avenue, after World War II, they had to figure out, “Oh my goodness, we’re not producing this stuff anymore.” That’s when marketing really hit its heyday.

EB: “We have to sell toothpaste now.”

PW: I know, exactly. And the baby boomers, of course, you have, “We’ve got to sell diapers now,” now later on.

And little by little, as people got older, the products that they advertised and marketed changed, but companies continually produce things. And what you were talking about with Ukraine and Russia, the whole talk about Russia and their involvement right now and giving intelligence to Iran, that has been a big news item.

EB: And maybe munitions, I think.

PW: You think munitions as well?

EB: I think so.

PW: Well, and on the other side, we’re using drones that were tested by Ukraine, right?

EB: Yeah. Well, it’s mutating technology. War is capitalism magnified, really.

PW: I’ve been amazed just to see the technology that we have.

EB: Yes. Well, and the Israelis that have some high-energy weapon that’s melting missiles coming in or something, that’s pretty cool.

PW: It is unfathomable. I mean, we talk about Space Force. I’m just wondering what Space Force has that hasn’t been unleashed, because we don’t want anybody to know it’s there.

EB: Right.

PW: You just go. I don’t know, anyway. But yeah, go before we agree. Yeah, go ahead.

EB: Actually, this was a personal note just because we were talking about Space Force and all that. I’ve had numerous calls and questions and meetings this week of how the boys were doing, because both of our sons are active duty. So a lot of clients had called, “Hey, is Jordan involved? Is Justin involved?”

And so they’re safe. They’re not currently participating in the sandbox or launching any rockets or anything like that, but thank you for your concern if you’ve been curious about that.

PW: That’s cool that your clients asked about that. Yeah, that’s really cool.

Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.