Making Money in a Time of War
Editor's note: With the tumult of the past several weeks, learning how to navigate the current state of the world and the market is as important as ever.
So this week, we're taking a break from our usual fare to share a timely essay adapted from the April 2022 issue of The Total Portfolio.
In this essay, I discuss the effects of wars on asset prices, which I took the time to study after Russia's 2022 invasion of Ukraine. Between the ongoing war in Eastern Europe and now the war in the Middle East, this essay offers vital lessons for what investors should expect going forward.
In 1940, Hitler's war machine swept across Europe.
It took Holland in five days. Then it took Belgium.
Next, it rolled through France, despite the country's respected army of 5 million men and its "impregnable Maginot Line" (underground fortifications stretching along the border with Germany).
That, in turn, sent the British Expeditionary Force – a collection of around 400,000 of the Empire's best fighting men – scrambling in an embarrassing retreat to the French sea town of Dunkirk. There, British soldiers waited nine long days, under heavy enemy fire, for an evacuation.
It felt like Germany was unstoppable. Even British Prime Minister Winston Churchill called the fall of France – considered, at the time, to be the finest army in the world – and the British evacuation of Dunkirk a "colossal military disaster."
Here's how Barton Biggs described things in Wealth, War & Wisdom, an outstanding study of the investment implications of World War II...
The armed forces of the Western democracies seemed weak, inadequately equipped, and poorly led in contrast to the technology, discipline, training, and boldness of the German and Japanese military juggernauts. In Europe, the German mechanized divisions with their panzers, half tracks, and motorized infantry had simply trampled and overwhelmed all opposition. In Poland it had been tanks against cavalry.
Both the Germans and Japanese immediately established air superiority over any battlefield, and the Japanese had been the first to understand that ship-to-ship gun battles at sea were mostly a thing of the past, and that aircraft carriers were now the crucial factor. They also realized that carrier-based aircraft could sink the most powerful capital ships.
The German and Japanese strategists also understood the immense advantage of surprise, armor, and mass, and they seemed modern, brilliant, and daring tacticians while the Allies and the Russians appeared to be led by defensively minded, elderly defeatists.
So when Germany attacked the Royal Air Force ("RAF") in British airspace during the Battle of Britain, the Allied forces had reached a point of extreme pessimism...
And yet there was one particular class of folks who saw not an opportunity for fear, but an opportunity to make money off everyone else's fear. They weren't profiteers or price gougers. They were investors...
By all accounts, the RAF didn't stand a chance against Germany's Luftwaffe. The Germans had about 2,000 aircraft. Britain had fewer than 800 (though it continued to build new ones as the battle raged).
The New York Times reported that the Luftwaffe was superior in both aircraft and pilot skill.
Within two weeks of the battle, the RAF had to send pilots who were only partway through flight school into the sky for combat. And Churchill's private notes reveal that the RAF could only handle a few more weeks of this type of fighting.
From July through October 1940, Britain lost 915 planes, and the Luftwaffe lost 1,733. Hitler – who considered gaining "absolute mastery of the air" crucial to a land invasion of England – abandoned his plans.
The Battle of Britain was undoubtedly a turning point in the war. It was the first major loss for Hitler's unstoppable army... a loss investors had foreseen weeks before.
Stock markets in the United Kingdom bottomed after Dunkirk, and then – well before the Battle of Britain even began – they started to steadily rally...
You see, those investors knew that markets don't rally after the big victory or the end of the war. Markets rally after the point of maximum pessimism.
Markets rallied – in this case – from a point at which the national pride had been shattered, Hitler was planning an assault on the homeland, and the country was arming half a million elderly men with WWI-era rifles to defend the beaches.
You could tell the same story about the June 1942 Battle of Midway in the Pacific. The U.S. winning a decisive and miraculous victory over the Japanese was another major turning point in World War II, but most observers didn't recognize it as such until later. In fact, the official releases from the U.S. Department of War didn't even consider Midway a victory right away. Critics had lobbied complaints that the department was spinning losses into victories for the press, so it softened its tone.
The U.S. stock market, however, knew the war could be won a month before Midway. And it had already risen 13% from its 1942 lows.
The uncertainty of war causes fear and breakdowns in smoothly functioning markets that can lead to higher stock returns. In short, war can be a chance to grow wealth.
Of course, we don't relish the lesson. Any loss of life is tragic, and we deeply sympathize with the victims of violence and those displaced by combat. We would prefer to live in a peaceful world that could ignore the topic of war entirely.
But as the fighting intensifies overseas, you need to know what to do with the portfolio of wealth you've worked decades to amass. And it's our role to talk money in a time of war.
The Economic Opportunities in War
After Russia's invasion of Ukraine, I began rereading my dog-eared copy of Studs Terkel's The Good War. Published in 1984, the incredible Pulitzer Prize winner contains more than 100 interviews with those who lived through World War II... everyone from front-line infantry to those struggling with rationing at home to German submariners.
It reminds you what the hardships of war look like and gives you hope for the concerted effort to protect democracy.
The book also contains a section about those who made gobs of money from the war effort, like George C. Page, who had a business cold-packing fruit and sending it off to other parts of the country.
When the war started, Page built some models of industrial plants and offered to rent them out. Companies like Northrop Grumman (NOC), Hughes Aircraft, and others immediately took him up on the offer. He built massive facilities and rented them out for years.
When folks feared a Japanese invasion from the Pacific, Page bought Malibu beachfront properties for $30 per foot of coastline and later sold them for $300 per foot.
Another interview with grocery-store owner Lee Oremont showed how concern of war turned into profits. Here's what Oremont said about his store...
I told my partner, with all the problems coming up – rationing, shortages, labor scarcity – if we could hold on to this at the end of the war, we'd have done a good job. Instead, business jumped crazily. You could sell anything you got, it just walked off the shelves.
There's nothing untoward about prices rising during wartime. Governments decide they need certain provisions, such as meat or rubber in World War II – or oil today – and they offer higher prices because that's the best way to secure the goods.
The economic boom from World War II led to wealth for many.
In the postwar period, nominal gross-domestic-product growth spent most of its time above 5% – with some growth as high as 20% – which gave birth to the American middle class.
From 1940 to 1960, the S&P 500 Index returned 1,408% (including dividends).
Barton Biggs, the investment strategist and author we mentioned earlier, found that in countries that maintain stable markets and don't get occupied or conquered, stocks tend to do well through wars.
They don't go straight up – as violence always leads to fear and sell-offs. But the periods of fear look like buying opportunities in retrospect.
On the other hand, countries that get occupied tend to see massive wealth destruction.
If you are a U.S. reader, consider yourself fortunate that our military and, more so, our geography make us difficult to conquer.
Here's what Biggs recommends if you end up in the path of an oncoming army...
If wars and apocalypses are recurring and inevitable, what should the person with wealth do? Experience suggests, that for in-country wealth, land and properties in your own country are the safest havens in a chaos prone, vulnerable world.
An unostentatious farm or farmland, not a great estate, is probably best. Bricks-and-mortar real estate can be expropriated or bombed, but the land is always there. It can't be plundered or shipped off to somewhere else. During World War II in most of the occupied countries, if you had a self-sufficient farm, you could hunker down on it and with luck wait out the disaster. At the very least you were sure of food in a starving country.
In the stock market, defense contractors are the most obvious shelter for wealth during a time of war as they're beneficiaries of increased military spending.
The Cold War led to significant outperformance in defense stocks as the U.S. scrambled to spend on programs that would keep us ahead of the Russians.
The U.S. still has massive investments to make to shift our military away from the insurgent warfare we saw during the War on Terror and toward "great power" struggles with Russia or China.
There's a saying in the markets: "Buy at the sound of cannons, and sell at the sound of trumpets."
The data bear this out. Investors panic when an invasion begins, and stocks fall. But look what happens once investors realize that for most, the world will continue as they know it...
The lesson here is clear.
When other investors panic and sell during times of war, you should buy.
Of course, the risk is that the war you face today turns into a larger conflict, at which point, we would see new market lows. And if we see a nuclear conflict... well, all historical analysis will be rendered moot. Your market returns may be, too. But we just don't know the odds of that happening.
For now, history proves that geopolitical fears don't drive markets down for long... and that you should look forward to a brighter (and richer) day.
New Research in The Stansberry Investor Suite...
Today we covered how war, though grim, has historically led to opportunity for investors.
With the recent geopolitical conflicts and the entire world currently on edge, many investors are scared.
They wonder what war overseas will mean for the market and the economy. Will we see more volatility in stocks? Will the economy tank? Will there be more tariffs? Will oil prices soar?
But remember, markets often rally not at the first sign of peace, but when we reach the point of maximum pessimism.
In this week's Stansberry Investor Suite research, we highlight a company built for these moments...
I'm talking about the world's largest defense contractor.
This company's business has been around for generations, and it has played a role in nearly every major U.S. military effort since World War II. Its top-secret engineering division has created some of the most advanced aircraft technology ever.
Importantly, nearly all of its revenue comes from long-term government contracts. That means it has a steady stream of income that lasts years. Even better, it uses that cash to return billions of dollars to shareholders via dividends and buybacks.
As tensions rise across the globe, this company stands to see a huge wave of demand. For investors, its stock may be one of the most dependable ways to build wealth in uncertain times.
Stansberry Investor Suite subscribers can read the entire report here.
If you don't already subscribe to The Stansberry Investor Suite – and want to learn more about our special package of research – click here.
Until next week,
Matt Weinschenk
Director of Research
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