How should we invest during a war?

Photo: Sgt Wilks, No 5 Army Film Unit. Source: Wikipedia. Public Doman.

Most of us didn’t see this coming. When we look back at Wall Street’s predictions for 2002, very few analysts predicted a Russian invasion. And no one, as far as I can tell, predicted a spirited armed resistance that would stop the Russians in their tracks, or cancelling of Russian oil and gas sales, banking, oligarchs, and Big Macs that would have the effect of isolating the Russian economy and creating an inflation spike at home – an inflation spike that might even lead to a recession over here.

In the face of such uncertainty, how should we act?

It’s helpful to look at a little history. Wars, rumors of wars, and economic sanctions have been with us forever. We can learn a lot by studying how earlier generations considered these questions.

Shortly after Germany invaded Poland at the start of World War II, Oxford Professor (and WWI veteran) C.S. Lewis gave a lecture entitled Learning in War Time. Lewis addresses the quite reasonable question many of his students needed to face: “Why bother studying at a university if I’m likely to be called up for military service at any time? What’s the point?” The same question is relevant for investors today: with everything that’s happening in the world, what’s the point of investing? Aren’t there more important things to be concerned with?

To this question Lewis gives an emphatic answer: continue what you are doing, until you are required to serve. Wars don’t fundamentally change the human condition; they just aggravate our current situation. From the essay:

We are mistaken when we compare war with “normal life.” Life has never been normal. Even those periods which we think most tranquil … turn out, on closer inspection, to be full of crises, alarms, difficulties, emergencies. Plausible reasons have never been lacking for putting off … activities until some imminent danger has been averted.

To apply this to modern investors: our needs – for portfolio returns, for security of principal, for income – don’t go away just because there’s a war. In fact, the fact that there is conflict in the world makes the business of risk analysis and risk management much more important. And Lewis makes another subtle point that applies to our current economic situation: wars don’t create new conditions so much as they aggravate the current ones. We were seeing supply-chain disruptions and energy price spikes before; the war in Ukraine made them worse. We were facing a growing potential for stagflation before; the war in Ukraine increases those odds. It’s never been more important to map out the sources of risk and return in our personal financial situation.

Field map of WWII battle. Photo: Aneta Leszkiewicz. Source: Wikipedia. CC-BY-3.0.

But geopolitical tensions – wars – can create some particular dangers for investors. Lewis describes them as “enemies” for scholars in their studies, but they really apply to anyone. The first is excitement. It’s easy to get excited and distracted by headlines that trumpet the latest atrocity or bombing or economic sanctions. But there are always distractions – politics or media or local matters or personal issues – that pull us away from what we need to focus on and cause us to abandon our long-term plans. To this danger, Lewis notes that only people who truly want to accomplish things are able to get them done. Admittedly, for example during the Blitz, Lewis notes that this may take a superhuman effort at self-control. But we must do the best we can.

The second enemy is frustration – the feeling that in the face of volatility, time seems to become compressed. This might tempt us to shorten our horizons and focus on immediate returns, on what we see right now. But the reality is that we all have limited time horizons. “Happy work,” Lewis notes, “is best done by the one who takes their long-term plans somewhat lightly and works from moment to moment. It is only our daily bread that we are encouraged to ask for.” Note that Lewis doesn’t tell us to abandon our plans. But he does encourage us to keep them in perspective.

The final enemy is fear. War threatens individuals with death and pain, and it threatens our portfolios with losses. But all kinds of circumstances can create losses: credit events (Greece), corporate fraud (Enron), technical issues (“flash crash”), recessions (1991, 2000, 2008, 2020), pandemics. These are never easy to live through. But the only reason why recessions, fraud, of Ponzi schemes don’t usually bother us is we forget about them. I’m not saying to always be afraid. But we should structure our finances with these possibilities in mind.

Our investment strategy mostly depends on ourselves: our need for cash flow, our outside income, our plans for a legacy, our capacity to take risks, and our psychological makeup. These things don’t change just because there’s an autocrat in Europe trying to impose his will on another country. I’m not saying that we shouldn’t adjust our tactics. Just don’t’ doubt in the dark what’s been made clear in the light.