How to Invest When Terrorism Is Imminent
Today we need to have one of the frankest discussions we’ve had to date – what terrorism means for the markets and your money.
It’s not a pleasant topic by any stretch of the imagination and the horrific events in Paris last Friday evening make that abundantly clear. Yet, it’s necessary simply because War, Terrorism and Ugliness are growth industries.
Whether we agree or not is moot.
My job as Chief Investment Strategist is to guide you through what’s happening, help you protect your money, and insulate your financial future from anything or anybody who threatens it.
No hype, no conspiracies, and no nonsense.
Why Another Attack is Inevitable & What You Can Do About It Before It Happens
ISIS may be the most serious threat to humanity in 2,000 years.
According to various intelligence agencies, the organization controls an area roughly the size of Great Britain and may have 200,000 fighters under arms – every one of whom is inspired by a strict interpretation of the Koran and a desire to return the world to a warped vision of purity that existed when the Prophet Mohammed was alive.
The horrific events of Paris are, sadly, only an opening gambit in a long line of smaller attacks that are gradually upping the ante.
The world’s political leaders have been shamefully naïve to date. Worse, they’re totally outclassed. Whether that’s because of arrogance or ignorance, I’ll leave to you. Either way, the West is woefully unprepared to deal with the challenge ISIS represents.
Making matters worse, the very technology we’ve created, ISIS exploits. The savagery is slick, unrelenting and broadcast around the world in seconds thanks to the Internet. Individual fighters maintain profiles on Facebook, Twitter, and other popular social media services. They’re “liked” by millions. There’s a glossy monthly ISIS magazine in several languages and – get this – even a 24×7 “help desk” staffed by senior combatants to help with recruitment, encryption and attack planning.
President Obama is calling Paris a “setback” even as other nations take the fight to ISIS. Russian strongman Vladimir Putin has come in from the cold to work with the French as allies. But again, that’s NOT the debate here.
There are two key takeaways that are far more important.
First: Terrorism Is a Catalyst for Innovation AND Profits
Most investors are preprogrammed to run from chaos and that’s entirely understandable. They fear the unknown terrorism represents.
The better course of action is to engage, especially now.
I say that because at its very core terrorism is a catalyst for change. No doubt it’s very scary; I’ve traveled in areas where I was a target literally and figuratively so I can vouch personally for just how unsettling this can be.
But that doesn’t change the fact that catastrophic events introduce change. Many scientists actually would tell you that they accelerate it.
I know that’s clinical and cold but that’s also the unfortunate reality of the situation.
Contrary to what the media would have you believe, terrorist events do not weaken the global economy. In reality, they’re highly localized events which means, by implication, the markets will bounce back over time.
That’s why you want to do everything you can to resist the temptation to head for the hills when the next event happens.
Again, I know this is not an easy concept to come to terms with. But it’s an important perspective to develop now, ahead of the next attack, because that way you’ll know how to put whatever horror surfaces into perspective.
History shows beyond any shadow of a doubt that buying when “there’s blood in the streets” is prudent. Warren Buffett, the legendary Jim Rogers, and the late Sir John Templeton have all made billions building positions with strong fundamentals at times when others are selling.
My paid subscribers have also had the opportunity to rack up gains by exploiting Templeton’s “maximum pessimism” strategy, including profits of 204.5% from Gilead Sciences Inc., profits of 333% from ProShares UltraShort Yen (YCS), 186% from Raytheon, and more.
I want you to do the same.
And brings me to something else that’s important to understand before the next terrorist event grabs headlines.
Second: Capitalism Creates Opportunities Faster Than Terrorists Can Destroy Them
ISIS practices a theology of destruction based on an “untamed Wahhabism,” according to Princeton scholar Bernard Haykel. That makes it very different from using terrorism to redeem Muslim nations as practiced by Al Qaeda. ISIS uses violence in a drive to purify Islam. There is no means to an end… just the end.
The biggest irony of all here is something no terrorist understands – when terrorists issue threats to unravel society by unleashing bioweapons in the world’s major cities, detonating nuclear weapons, hacking planes or simply slaughtering anyone who gets in their way, their targets respond by channeling trillions of dollars into companies needed to combat the menace.
For example, the terrorist attacks taking place in 2001 heralded a major shift in U.S. defense spending. Nobody faded away in fear nor did society collapse despite the fact that’s exactly what Al Qaeda wanted.
Instead, defense spending contracts jumped more than 12%, from $356 billion to $400 billion in little more than a year. By 2010, spending had risen 86% even as the U.S. prepared to wind down two Middle Eastern wars.
Savvy investors who “engaged” at the time did very well.
Boeing, for example, has returned more than 448% since September 11, 2001. Northrop Grumman is up 507%. Lockheed Martin, 629%. The S&P 500, by comparison, has turned in only 98% over the same time frame.
The other thing to understand here is that it’s not just defense companies that benefit. In fact, post-terrorism related spending goes way beyond traditional bombs, bullets and bayonets.
For example, the Energy Independence and Security Act signed into law by President Bush in 2007 mandated a 500% increase in the use of renewable fuels by 2022 as a way to lessen America’s reliance on foreign oil and tyrants with spigots. President Obama has also signed initiatives to boost renewable energy for the same reason. The result has been a boon for renewable energy companies like SolarCity (up 131% in less than three years) or First Solar Inc., which soared 727% in the months after President Bush signed green-energy legislation into law.
A 2006 study on the effects of terrorism on foreign direct investment, conducted by CEO Daniel Wagner of Country Risk Solutions, found that foreign direct investment actually tripled in the developing world between 2000-2004 – a time period which became known as the apex of the global war on terror.
FDI to developing countries increased as a percentage of global investment, climbing from 18% to 36% in the same time frame.
I know that’s counter intuitive but, again, there’s a good reason.
Capitalism is about the future. It’s a vote for resilience, not cowardice and certainly not for the dystopian vision that ISIS is peddling.
Few people remember this, but 9/11 resulted in a 4.9% drop during the first day of trading four days after the planes hit the World Trade Towers. Losses culminated at 11.6% eleven trading sessions later. Thirty one days later, however, the markets were back to pre-event levels.
The median losses for such market events as Pearl Harbor, President Kennedy’s assassination, 1987’s Black Monday, Lehman Bros collapse and even the 2010 Flash Crash were 2.6% according to S&P Capital IQ’s Sam Stovall.
Globally, the situation is much the same.
Table: Impact of Four Major Terrorist Attacks on Reference Indices over Time
|Location||Date||Reference||Percentage Index Change at…..|
|Index||Low on Attack Day||Subsequent low||Year End|
|New York/Washington.||September 11, 2011||S&P 500||-5.0%||-13.5%||5.1%|
|Madrid, Spain||March 11, 2004||IBEX 35||-3.1%||-7.6%||9.5%|
|London, U.K.||July 7, 2005||FTSE 100||-4.0%||N/A||7.4%|
|Mumbai, India||November 26, 2008||Sensex||-0.4%||-2.6%||10.9%|
The world will go on.
That’s why I’ll be dedicating upcoming columns to the special perspective, skills, tips, tactics and investments you can make to defend yourself and your future from those who seek to destroy it.
I’ll be with you every step of the way.
Until next time,