The Investor Coach Answers: How Will the War Affect Markets?

Answering Your Burning Questions

Paul Winkler: Welcome to “The Investor Coaching Show.” I’m Paul Winkler. We talk money and investing around here, answering those burning questions that people have, and I use that as a setup because we have burning questions this hour that I’m going to get into for the fun of it.

Yeah, I’ve been doing this for so long, I don’t get questions from the general public, people that maybe haven’t heard the show before, and people that don’t have familiarity with what we do. Or I just don’t necessarily know what is on people’s minds.

So, it’s always really cool for people to ask questions online. You can do that at the website, paulwinkler.com/question or questions, either one. Either one will get you there.

The thing is, you go to the content section of the website, paulwinkler.com, and you can actually ask a question there, and I’ll handle it here on the show. And if you’re a subscriber to the podcast, that’d be great because then you’ll get a feed, and then you might see, “Hey, there’s my question,” or “There is a question that I have and that somebody else asked.” A lot of times that’s the case. As a matter of fact, Ben Hall on Channel 5, he’ll always ask me, “I want to ask you this question.”

And I’ll always say to him, “Hey, man, ask away, because if you have the question, a lot of other people do as well. So, there’s no such thing as a stupid question. It’s just that people don’t know what they don’t know, and they may be asking a question that they think is dumb, but it’s not. It can get into some deep territory.”

So, anyway, that’s the way you do that. I went on there. As a matter of fact, one of these guys that actually asked me a question a while back on Channel 5 called back because I was on there this week and said, “Hey, have you ever looked into something that I asked you about a couple months ago?”

And Ben’s like, “Yep, Paul has looked into that in depth.” And I said, “Yeah, I have.” And it was the question about the Yrefy.

The idea behind that is you see these commercials, “complete liquidity, high interest rate, you’re going to be doing great.” It’s implying all kinds of safety and all of those types of things.

When I did some research on it, it was something for accredited investors — and those, I kiddingly say, are people with enough money that if they lose it, the government doesn’t really bat an eye. They don’t worry about it much. It’s not an investor class that is to be protected.

Matter of fact, more about that coming up regarding who’s getting protected and how some of those protections are coming down. Unfortunately, it’s going the other way.

---

So, becoming an informed investor is becoming way, way more important than ever before because you’re just not going to get protected. 

---

It’s buyer beware out there. It really is.

The Fine Print

So, I talked about accredited investors and that this is an investment target at that. So, the people that have student loans in default are primarily what this is dealing with. And they’re actually coming in and saying, “Hey, if we lower your interest rate, will you actually be responsible and pay your student loan?” That’s my take on it.

But anyway, it defies gravity because you have an interest rate that is very high that they’re promising to pay you, but the interest rate they’re charging the people that are actually borrowing the money is significantly lower. And you go, “Well, how does that math work out?”

And that was one of the things that was discovered in my research. It was, I don’t want to call it class action, it was more of an issue in the state of Massachusetts that ended up getting settled, and that doesn’t say, “Hey, we’ll just settle this out of court,” type of thing that I read.

The other thing that really got me was this: All these commercials talk about how you have access to your money, you can take monthly withdrawals, and you’ll have liquidity, and you read the fine print and then go scan the QR code that they have there, and they tell you, “Check out the QR code.”

I guess it’s just not expecting that anybody’s actually going to do it, which is often true. People don’t actually read the fine print, and I’m a big fan of making sure you get what you’re doing, why you’re doing it, and how things work.

---

The fine print is where they take away all the promises that they say out loud.

---

And the promises were taken away in that fine print, I told the guy. Liquidity, it was just up to the company, the issuing company, if you got access to your money or not. And the safety issues were taken away in the fine print.

So, I’m telling you, if you want to really get into it, I have whole radio segments on this, getting into great detail. Told them to go check out the website, paulwinkler.com, and you can find me talking in depth about what I found in that research.

Risk and Return

It’s anytime anybody tells you, and this is my bottom line, anybody tells you that they’re going to give you a high interest rate and there’s no risk, run, don’t walk. Because if there is no risk, they don’t have to pay you anything to use your money.

And we were talking about that regarding the stock market in general. When it comes down to the stock market, we look at the volatility, quote unquote. “Is it more volatile today than it ever has been?” No, absolutely not.

When you look at what’s been going on, it’s nothing compared to what it was in the ’70s. It’s nothing compared to what it was in 2008. It’s nothing compared to what it has been, in 1987, in many time periods throughout history.

---

Volatility is just a part of the game. I tell people, embrace it. 

---

If it weren’t for the volatility, stock markets would not give you a higher rate of return than Treasury bills that have no volatility, kind of like CDs, basically the government issuing a note that is very short-term in nature.

They’re borrowing money for a year or less is what a Treasury bill is. So, you don’t have risk, but you also don’t have return. After inflation, the rate of return of Treasury bills going back over 100 years is roughly zero. Just a tiny bit above zero, and after taxes, if it’s a taxable account, it is zero or negative.

So, you look at that and say, “Wow, okay. If there is no risk, there is no return.” And those two things go hand in hand. We know that intuitively, but the reality of it is that a lot of times, we just don’t quite get it.

We hear things that are supposed to be protections against risk, right? Something that’s going to help bring your portfolio up or actually create less volatility in your portfolio.

And a lot of things that are sold that way, I’m telling you, don’t work really well. They sound good on paper, but when it really gets down to it, risk is all a part of so many different things.

Investing in Precious Metals

Now, you have things that are risk-free, and that’s stock market risk-free, which would be Treasury bills and those types of things. But things that are often talked about as being a protection against downside risk, perish the thought.

Matter of fact, that was one of the questions that came up, and here it is. I’ll just give it to you.

Question: So, in years past, I’ve understood from you, Paul, that you do not prefer investing in precious metals, gold and silver, et cetera. So, what is your position now that gold and silver and precious metals have risen astronomically, especially in light of the fact that so much silver is needed to build Teslas and other manufacturing products?

PW: Okay. So, great question. Have I changed my position because gold and silver went up in value?

Now, silver went up, and it came crashing back down. And gold, as a matter of fact, as we’ve had some of these oil spikes, has actually come down. It went down in value with stocks.

And you go, “Well, wait a minute. I thought it was supposed to be a protection against that,” and that’s not exactly what happened.

What about the utility of the metal, silver, or gold? And let’s throw in there copper. Let’s throw in there conductive metals and things like that.

---

What happens is supply and demand drives that, and it’s tenuous at best. I don’t know when the demand is going to go up, when it’s going to go down. 

---

People often talked about how gold was a protection against inflation. “If you have lots of inflation, you need to own gold; that’s going to protect you against inflation because inflation is the dollar going down in value.” And if you have that, you’ve got to make sure you’ve got something that protects against inflation.

And the point is that in the early 1980s, when we had a ton of inflation, inflation hit like 12%, which is basically, if you have an ongoing inflation rate of 12%, that price is doubling every six years, just to put that in perspective. Now, what happened during the 1980s when you had these high inflation rates?

Well, actually, gold went down, down, down, down, down. And there were a bunch of people out there going, “I think it’s going to hit 2,000 an ounce. I think it’s going to hit 2,000 an ounce.”

Well, it took, what, 40 years for that to actually happen. You go, “Well, wait a minute. Where was it protecting me in all of that period of time?”

And of course, there’s that famous CNBC clip that I played here on the show where the guy is just going, “Hey, 4,500-year return on gold, zero after inflation.” And there was silence on the set at CNBC when he said that.

He said, “You could buy the same amount of stuff 4,500 years ago with an ounce of gold that you can buy today from a standpoint of foods and things like that that you would buy now that you would buy back then.” So, really no protection when it gets down to it.

Why Do Stocks Have Protection?

Now, stocks, why does that have that protection? Why is it that I don’t advocate precious metals?

Well, because like I said, you could have inflation go up, and metals go down, or like what just recently happened, stocks went down, and metals went down with them. Bitcoin went down with them.

---

So, these things that are supposed to be protective, it’s really kind of a random thing. 

---

If you look at the standard deviation, I mean the level of volatility, that’s how you measure volatility, it’s off the charts high for these things, for these metals. And utility, yeah, it’s great and everything, you have utility, but where does the utility increase or decrease with the economy? So, let’s say that part of the value of this metal is because people are using it not just as an asset and investment assets, quote unquote, but they’re also using it, and it has utility in manufacturing.

Okay, so let’s say that we have that, and let’s just forget everything, and let’s just say we’ve got utility in manufacturing. Let’s say that the economy slows down and manufacturing slows down.

What also slows down? The demand for the metal that had utility in manufacturing. And if that happens, what happens to the price of that thing? It goes down because the demand has gone down.

So, all of a sudden, you thought that you had this because it was a protection against a recession, and now you’re seeing that they’re going down together. You see where this really runs into some significant problems.

And what often happens is that people are saying, “Well, because the dollar’s going to crash, you need to own our gold.” And my question is always, “Why are you taking my dollars for your gold if your gold is so stinking good? Why would you have any utility for my dollar if my dollar isn’t going to be worth anything?”

Psychology Drives Our Investing

Now, going back to why equities, why stocks? Well, companies sell things, and they accept currency in exchange for the goods that they sell or services that they sell. And if all of a sudden you have inflation, and now I have to charge more for that thing that I sell because the dollar has gone down in value, and because stocks sell for a multiple of earnings, what goes up along with my inflation? The price of my company.

Because my company owns property, it owns buildings, it owns maybe some commodities. I mean, think about gold stocks and things like that. Companies that were gold mining companies actually went up. I saw one report, it said that it actually had gone up more in value than gold itself, as far as a percentage rate of return.

And at least they’re producing a product. Not that I would advocate going and buying these companies; the horse is out of the barn, no sense in closing the door now. But this is something you have to really think about.

---

Recognize that there are people trying to sell you things, and they benefit from you buying these things.

---

There’s a great commercial out. I’ve been talking about this for a long time. I saw a commercial on TV the other day, and these guys are going up to this Wild West town.

They’re dressed in Western garb, and they’re coming up to this town, and it’s the gold rush years. And I think there are three of them. I remember in the commercial, three of them come up, and the camera’s on them, and they go, “Hey, let’s go get that gold,” a couple of them say.

One of them says, “Stop, stop, everybody.” And he goes, “What? What?”

And he’s seeing all the tents and all of the people out there getting ready to mine for gold, and it’s just the landscape is littered with tents and camping equipment. And he says, “Let’s do this. I’ve got an idea.” And he starts up a business selling picks and shovels.

And that is so often the case that we see that, that people will take advantage of our greed. I mean, kind of, really? Think about it. That’s what’s going on, isn’t it?

Or they’re taking advantage of our fears. And I was actually teaching to a group of psychologists this week, and I was talking about money things. And one of the things that hit me as I was talking about this was one study showed that it was 80 to 90%, and when one person said it’s probably 100% of our decisions around finances are not driven by logic, analytical thought. It’s really our psychology that drives the bus, subconscious.

Impact of Parents’ Financial Views

Maybe it’s things that our parents did. I was talking a little bit about my mother. Rest her soul, my mother absolutely believed that you were not successful — I mean, not totally, but this is a big part of her thinking — that success equaled education, of course. So, that’s why I’m big on education, I guess. I guess financial planning designations, an economics degree, psychology degree, I’m big on education.

But the other thing that was big for her was owning real estate. Where’d that come from? Well, it came from her father.

Where did that come from? Maybe his father, I don’t know, but I don’t go far back on the family tree and look at how people believe.

But the reality was that she didn’t believe you were successful. And my father hated it because he had to manage the real estate. He didn’t like it at all. It was a pain to him.

So, he would charge under-market-rate rents, little family history here. He would charge under-market-rate rent so that he wouldn’t have to deal with people moving in and moving out all the time. That was dad’s thing.

So, that’s why he wasn’t the greatest real estate investor of all time by any stretch of the imagination. It’s a job, and it can be a really hard job.

---

But that is what drives our behavior so often, things that we’re not even thinking about. We don’t think about how emotions, instincts drive the bus. 

---

And that is really why I try to educate. I try to build up the cognitive part of your brain because if I can offset those instincts and the emotions just a little bit, which are magnified by the media, I think we can have a successful investor.

And little by little, there will be times that you slip, and that’s where I am coming out with all the information to help you understand, “Okay, what’s going on?” How do we put what’s going on in perspective? That’s what this show has always been about.

How Does War Affect Stock Markets?

So yeah, I think I’ll tackle something else right here. And this is a related question, I think. Yeah, technically, it is sort of related because everybody’s talking about Iran and markets. So let’s see.

Question: Paul, how do you think the war with Iran is going to affect our markets? And other than just hang on, what would you suggest?

PW: Okay. Yeah, so Kenny asked that question. So how does war affect stock markets?

It is a fog. To try to figure out how on earth markets are affected is anybody’s guess, because if you look back through history at wars, and I think Evan talked a little bit about this, you see a history that shows pretty decent returns during periods of war.

Ironically, and you hate what we have to go through as a country, but the reality of it is that it creates demand for certain things. And especially, I think what happens a lot of times in wars — and I say I think that, but I’ve seen it over and over again in doing this for over 35 years — when you’re about to go into anything uncertain, and let’s forget that this is about war. Let’s think about just anything where there’s uncertainty.

It could be an oil crisis. It could be a banking crisis. It could be a tech bubble popping. It could be geopolitical unrest or whatever.

---

Anytime that there is risk, people demand more what? And we’ve said this, they demand more return. 

---

Well, if I go down to my bank and I say, “Hey, can you give me a higher interest rate?” they’re going to tell me, “Hey, you know what? We can’t give you a higher interest rate because we have enough supply of money that we don’t need your money that badly to pay you a higher interest rate than what we pay everybody else.”

Now, there’s some negotiation. That can happen, and it does happen, where you walk into a bank and you say, “I’ve got $100,000 I’ve got to park on the sidelines for a year or so. What’s the best interest rate you have?”

And one bank will say, “Well, I can give you X percent.” And the other one comes in and says, “Hey, I’ll give you X plus this percent.” And you can get a higher interest rate because there is some negotiation based on supply and demand.

The Impact of Risk

Now, we can do that when it comes to interest rates. Now, if I’m looking at lending money to people, let’s take that as an example, if I have somebody that has great credit, they’ve got a really high credit score, and then I’ve got another person who’s got a really low credit score, I can command a higher interest rate from the person that has a lower credit score.

Why? Because they’re a risk. There’s risk to that. It’s the same thing with the stock market.

Certain companies, when you go into war, are higher risk than others. And we’re dealing with, let’s say, defense contractors. Well, when you’re going into war, they’re very, very low risk because they’re probably going to be making a lot of money selling the stuff that they sell to actually fight the war.

Whereas, if we’re dealing with other types of things like luxuries, let’s say, for example, well, if we go into a recession, what’s the first thing that people cut? They cut luxuries. So those companies would be higher risk. Now, what happens is that you’ll notice that as you go into it and then when the news comes out, and you can’t anticipate the news, you don’t know what’s going to happen.

---

That’s the fog of war. You don’t really know what’s going to be the news in 10 minutes from now, let alone 10 days from now.

---

But what happens is when that news comes out and you go, “Wow, this is riskier now,” luxuries are riskier. Let’s use that as an example.

I will say, “I’m not going to pay as much for the stock of a company that produces a luxury product. I’m not going to do it because I’m not sure that they’re going to be selling their product six months from now. I’m not sure that there’s going to be a demand for their product six months from now.” So I will drop the price that I’m willing to pay.

Now, if things come out better than I thought they were going to come out, “Oh, this was way more short-lived than I thought it was going to be,” or the general consensus, not even you, not even what you think, it’s more what the general consensus of all informed investors thinks that’s really, really important. If this thing is less of a big deal than the general consensus of all informed investors, what will happen is that stock price will jump significantly.

I will be greatly rewarded for having taken that risk, in other words. Now, the companies that didn’t seem to be risky at all, defense contractors, will drop in value because it wasn’t as bad as what we thought it was going to be.

Getting Used To Market Fluctuations

So that’s what makes it so confounding, trying to figure out what’s going to happen next. Now, the point that Kenny’s making right there, he says, “Yeah, what do you think? What do you think is going to be the outcome?”

---

I think companies are going to adapt to whatever happens. If what happens is a recession, let’s say, they’re going to cut expenses significantly. 

---

They’re going to do whatever they’ve got to do to get their earnings to go back up. So when they cut those expenses, that’s one way of getting to higher earnings in the future. It’s one way of protecting yourself as a company.

Another thing that could happen is that they actually, and this is what happened in World War II, I can actually change what it is I’m selling to something else that’s going to be more profitable based on the circumstances.

Now, where did that happen? Well, it happened in car manufacturing, for example. Now, people weren’t buying cars. It was a luxury to buy a car back in World War II.

But we had to have tanks. We had to have ships. We had to have airplanes. So what happened is they retooled and regrouped and got into selling something that was needed, that there was demand for, and they increased their profits that way.

Now, there is a lag time between when I have this news that comes out and when I have changed my operations to adapt to the new circumstances. And that’s that period of time that you go through, and you go, “Well, you know, there’s volatility in markets.”

It just happens, and that’s just the way things work. And recognizing that it’s part of the deal makes it a whole lot less scary. If you look at 5% downturns in the stock market, we’ve talked about this before, 5% downturns entry year inside of a year happen on average like three times a year at least, historically going back 70 years now, I guess the data goes back on that research.

So we’re looking at 5% downturns are so common it’s just like dirt. And if we look at 10% downturns, about once a year, I think it is, something like that, 20% downturns, like what, every four years, five years, something like that.

I don’t remember. The data gets a little bit fuzzy for me after a while. I don’t remember, but it’s often enough.

It just reminds me of that little scene in “The Blues Brothers” movie where John Belushi is moving in with Dan Aykroyd and he lives near a subway and the trains go by and they keep going by and going by. And he goes, “How often does that happen?”

He says, “So often you’ll never notice it.” You’ll get so used to it that it doesn’t bother you anymore. And that’s what I’m hoping will happen with you as an investor, that you’ll be so used to market fluctuations that it doesn’t even bug you anymore.

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.