Originally published March 12, 2022
When huge shocks like a war hit world markets, some companies become winners and others become losers. In a sense, every stock goes through a repricing process as new information enters the market. As the shock of war ripples through the system, military defense companies, and affected commodities like oil producers, fertilizer producers, and gold can quickly become winners while sanctioned Russian companies like Gazprom and Lukoil can similarly become big losers. In addition, any foreign company having joint ventures with Russian companies (there are lots of them), will also suffer. Entire sectors can rotate into and out of favour quickly during the conflict, but historically the market as a whole washes out over time, and market returns are generally normal, albeit with great volatility. Case in point, most of the World War 2 period had positive returns.
At the portfolio level, it’s a different story. If you have a five-stock portfolio and they are all European banks with business in Russia, you are in big trouble. You are in less trouble if you own only a couple of these affected companies among a 20-position portfolio. Maybe you are lucky and not one of your positions has ever even met a Russian. Luck as most of you know plays an important part in investing.
Impact on My Portfolio
In my case, my European banks got hurt as they do deal with Russian companies. My large energy positions which should have provided a big 8% or more boost ended up holding the short end of the stick because Shell has a Russian investment that it has decided to write off, and the stock is down 8%… bad luck. While at the same time my Cameco (uranium) position went up 22% (good luck). There are winners and losers in my portfolio and overall the portfolio is still ahead of the market but only by 3.5%. Pre-war, I was almost 5% ahead. Again, luck plays a big role in how each portfolio gets affected.
What Should the Small Investor Do?
So what should the small investor do after the shock? Not much… seriously. It’s caveman human nature that programs us to run away from scary events. Emotion is always our enemy. Doing nothing, as unintuitive as it may be, is usually the right approach. The damage is done, no sense in jumping off the cliff with the rest of the lemmings (sellers).
But what if the war escalates or becomes even scarier? Could there be unforeseen repercussions affecting energy? The banking system? Supply chain system? Crypto? Spaghetti? Maybe, but no one knows for sure. The world is much more integrated than it ever used to be so there is always a risk, but how is that different than any other day? Starting a war while most countries are still mopping up Covid and experiencing the highest debts to GDP in history is likely not coincidental.
The better question: is the war in Ukraine investable? It sounds selfish to ask this question but at the same time, you need to understand that some arrogant dictator is purposely wreaking havoc in the world and in the markets, and he is personally affecting your portfolio. Is it wrong to sell off your Russian positions? Or buy them? It’s everyone’s responsibility to manage their portfolios in the best way they can to achieve their long-term goals, even during depressing events. So, back to the question, is it investable? Not easily. Markets move fast with shocks. No one could have predicted a madman’s plans with any certainty. It’s generally not investable. This is where diversification before any shock was your only and best strategy.
So, What Now?
As much as the shock is not investable, there are certain tactile moves that one can make. Effectively, you could buy beaten-down Russian positions and assume in a year or more that everything will go back to normal… if that’s possible. I would advise against this as there is a risk that these companies get permanently delisted and you could see huge destruction of capital. This approach is definitely speculative at best and not what this newsletter is about.
What if you hold a Russian position? You likely only own 1 at best if you diversified and it likely represents under 5% if you follow the advice in this newsletter, so the situation is not terminal. Personally, I would not sell unless you feel that the added risk is beyond your portfolio’s tolerance. There is no perfect answer here, it’s one of those “it depends” answers. The only investable strategy, although simplistic, is to buy beaten-down quality companies that have been oversold and/or sell positions that are overbought. The market is moving quickly and you need to look around and wonder what is ridiculously cheap… Facebook, Alibaba, maybe Shopify. Figuring out what is mispriced considering the world context is the same challenge we always face, war or no war. There are always opportunities, you just need to find them.
Looking Forward
Many think that a war coupled with high gas prices will push the economy into a recession followed by a market crash. Although possible, history says it’s unlikely. Fuel prices alone have never been enough to cause a recession. In fact, there have been all kinds of things wrong in the world and the economy was quite fine. If you factor in the huge amount of cash in the system, the job market starving for employees, and super low-interest rates, you have a good basis for a bet that things will be alright for now. One day that will change for sure but not likely in the next year or so.
My last comment is that although shocking and sad, this war is regional and while Putin is a scary person with nukes, Russia has defaulted on its debts in recent history (1998) and its economy is overall smallish and unhealthy. For comparison, Russia’s GDP is about the same as Canada’s but it has more than 3 times the population. It’s in no way anything like the Soviet empire of old. It’s a war that they will likely regret.
On that note, happy investing.
Marc’s Monthly Moves
- Nada.
Marc’s Portfolio YTD Performance
- Portfolio return -7.6% (Including currency gains)
- Portfolio return -8.4% (without currency gains)
- SP 500 return -11.79% (benchmark)
- TSX return +1.13%
The portfolio overperformed the S&P 500 by ~ 3.5%.
Money with Marc 