I’ve started to read Wealth, War and Wisdom
Skimming ahead, I’m not sure how practical the book will prove to be as an investment guide. In Japan stocks and urban land proved to be good investments for investors who bought prior to the destruction of World War II. Farm land, on the other hand, did not do well. In France, by contrast, land and gold came through the war much better than stocks. In nearly every country afflicted by war, stocks outperformed bonds for the periods 1900-1949 and 1940-1949. One caveat that Biggs offers is that you can’t buy and hold individual stocks, since once-promising companies inevitably decay (computer nerds get branded as dullards by Biggs: “IBM and Intel were once great innovating companies, but now they are corporate research laboratories. Bill Gates was the innovator, not Microsoft”). How does Biggs, a professional money manager collecting fat fees, recommend to his readers that they maintain a diversified equities portfolio? Through low-cost index funds: “It pains me to write it, but professional investors don’t do much better [than individual investors picking stocks and underperforming the S&P] on a statistically significant, risk-adjusted basis.”
Biggs’s strongest recommendation is to avoid being Jewish, especially in Europe: “German Jews, brilliant cultured, and cosmopolitan as they were, were too complacent. They had been in Germany so long and were so well established, they simply couldn’t believe that there was going to be a program that would endanger them. … As a result the German Jews had relatively little wealth outside of Germany, and reacted sluggishly to the rise of Hitler…”. Other regions of the world get some coverage as well: “In Iraq the wealthy Iraqi Jews who had lived there for centuries misjudged how fast and ruthlessly Saddam Hussein … would move to expropriate their wealth. … The same calamity befell the Indonesian Chinese who failed to anticipate the rapidity of the fall of Sukarno. … No matter how safe and secure your home country appears, even if it’s the United States, every truly wealthy person should have some assets elsewhere. History suggests that nothing is forever. … New Zealand recently has become the Shangri-la of choice for paranoid American hedge-fund grand masters. Currently wealthy Russians are paying up for residential properties in London, New York, and the south of France.”
Given the fact that the U.S. has not experienced a war on its soil since 1865 and that he is writing mostly for an American audience, Biggs seems a little obsessed with war. On the other hand, being invaded and conquered has been the most dramatic cause of wealth destruction throughout human history. And the U.S. has been at war for much of the past 70 years (see http://en.wikipedia.org/wiki/Military_history_of_the_United_States for the full list). Who is to say that if we keep starting wars we won’t eventually lose one badly enough to find the enemy here in Boston?
[One thing that we can’t fault Biggs for is timing the market for readers of books about surviving financial crises. According to the Amazon reader reviews, the hardcover hit the streets in January 2008, just one month after the U.S. economy entered the Great Recession, and came out in paperback in October 2009, just a few months after the recession officially ended (July 2009).]
More: Read Wealth, War and Wisdom
Phil,
I remember reading in some of your older essays that you generally thought index funds were a good way to be in the market for most folks. Not trying to get into your business, but has your investment philosophy changed since then, due to the recession or other factors? If so, love to see some updates:
http://philip.greenspun.com/materialism/money
http://philip.greenspun.com/materialism/early-retirement/investing
I ask because I find myself at a loss as to where to passively invest money these days. I’ve become cynical about stocks, bonds, mutual and index funds, precious metals, etc. I keep thinking of the old poker adage, “If you’ve been at the table for half an hour and haven’t spotted the sucker, it’s you.”
Mike: Because I ignored the standard advice to rebalance my portfolio periodically, my passive index fund investments gradually turned me into a foreign market investor (since the U.S. investments stagnated while the emerging markets, especially, grew). Now that the U.S. is only one quarter of the world economy (see http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal) ), I think it may make sense to allocate a much smaller share of one’s portfolio to the U.S. than was the previous standard. It is true that most of us will probably continue to live and retire in the U.S., but many of the things that we want to purchase will be priced based on the world economy.
I’m still an enthusiast for owning shares in companies, though looting by management is a much larger concern for me than it was in the past (also executive salaries and stock options are much larger than formerly!). I’ve been prejudiced by spending my formative adult years during one of the best periods in history for stock market performance (1981-1994).
A doomsday scenario for us in the US is not an invasion of Boston but in some form of terrorist WMD attack on one or more large US urban centers. Although as individuals we are not able to predict or stop such an occurrence, we might at least be able to plan financially for it. Alternatively, what if financial institutions’ primary and backup computer plans are somehow thwarted and no one knows who owns what?
Demetri: Biggs covers this situation to some extent. In Europe, for example, many of the land ownership records were destroyed during World War II. After the war, however, since everyone remembered who owned what, people reconstructed the records from memory. The only people who lost land under this arrangement were Jews, whose neighbors tended consistently to forget that they had lived there and owned land. The same situation applied in Switzerland. Jews would show up after the war trying to claim ownership of a bank account that a parent had established for them. The bank would refuse to give them the money until they produced a death certificate for the parent. This was not practical, of course, since the Germans did not issue death certificates for most of the Jews whom they killed. So the Swiss kept the money. (Though 50 years later under U.S. pressure they finally made some restitution.)
Phil, you may be interested to know that Nazi-era Germany had draconian laws concerning holding wealth outside the country, up to and including the death penalty – they wanted all Germans to hold their wealth in marks and physical property inside the borders. That is why the Swiss passed their bank secrecy law in 1934 – so they would not have their customers getting killed off, and to dissuade all the Nazi investigators who were snooping around trying to catch people.
This law cut both ways of course since later that same secrecy made it difficult to determine the existence of accounts.
Patrick: Thanks for that. Biggs indeed does not cover this important limitation, which could be relevant for current American investors as well. I think that the U.S. is going to implement a lot of new capital controls within our lifetime. The taxes necessary to pay off government obligations (pensions, Medicare, bonds) are going to be high enough to drive a lot of assets to countries with lower taxes. I don’t think the U.S. government is going to sit idly while the juicy assets that they want to tax migrate elsewhere. Singapore has a government that needs just 17 percent of GDP to operate. China is at 21 percent. Switzerland needs 32 percent. The U.S. is at 39 percent and “Stimulus spending has hurt the fiscal balance and placed federal debt on an unsustainable trajectory. Gross government debt exceeded 90 percent of GDP in 2010.” (from http://www.heritage.org/index/Country/UnitedStates#government-spending ). With higher spending and a stagnant economy, it seems inevitable that the U.S. will need much higher tax rates than these alternative countries. Singapore is rather hot and humid for my taste, but Switzerland is not exactly a hardship post. (And yes, I’m aware that the U.S. already has an “exit tax” on Americans who emigrate and renounce their U.S. citizenship, requiring them to pay capital gains on all of their appreciated assets.)
Dimitri: Setting aside the terroristic rhetoric from our minders in Washington, just out of curiosity, how is an urban terror attack a ‘doomsday scenario’?
Let’s assume a dirty bomb. Even the DHS says the casualty rate is low:
http://www.homelandsecurityus.net/WMD%20and%20Terrorism/dirty_bombs.htm
5% _increase_ in cancer, and considerable destruction of real property. Compared to an actual war (carpet bombing, nuclear bombs, etc) this seems like a minor inconvenience.
30,000 people die in the US _every year_ due to automobile accidents: 100 times the ten year fatality risk vs terrorism. We don’t seem to have quite the same doomsday paranoia about cars. Not sending cars and drivers to gitmo.
I guess I’m just dumb. Help me out here. 5% increase in cancer for <1% of the population people means the US is toast?
davep: I wondered about WMD inflicted upon multiple urban centers. Let’s say 10 yrs from now a suitcase nuke is set off in downtown DC, NY, Chicago and SF. The question posited by phil was that of an economic impact of war not of complete physical annihilation. I don’t think anyone would argue that the blow to the US economy would be anything other than enormous in a case like that.
Demetri: I think you have a good point. I estimate that the 9/11 attacks have reduced U.S. GDP by at least 5 percent (physical destruction, slowed economy, lack of confidence, increased spending on security, reduced productivity due to time spent in new security procedures). To the extent that U.S. asset values depend on GDP, that means asset prices have been reduced by 5 percent. A much larger attack on multiple cities could easily push asset prices down by 25 percent. That’s 13 years of investment returns (the S&P 500 is at 1264 right now; it was at 1000 early in 1998; let’s assume that the dividends paid in the mean time roughly compensate for inflation).
demetri: as philg says, there is a direct economic impact related to the loss of life and property and a much larger secondary impact due to fear and security circus.
Therefore, if we’re resigned to further attacks, fear/circus mitigation should be top priority. As the British might say, ‘stiff upper lip’. Instead, we have various forms of terror-induced government overreactions which scare people. Why? If we momentarily set terrorism aside and reevaluate, is everything going well? It’s a distraction.
The idea of a suitcase nuke is an example. Evidenced by the mountain of imported party drugs everywhere, a crude, cheap nuke is more likely. And too boring for propaganda purposes.
If an attack is probable, moving oneself far from any large city (e.g. Boston) is step one. If not, this talk of financial planning is more theater. Dead people don’t care about their bank accounts. Besides, would you actually put your money with a firm who put all their backups in major cities?
And finally, is rational financial planning properly more cautious now — post-911 — than during the cold war, when the risk of annihilation was 1000 times higher?
It is not correct to say that the U.S. has not experienced a war on its soil since 1865.
You are forgetting Perl Harbor, the invasion of Alaska, and U-boat attacks up and down the east coast during WWII.
I would also add the first and second attacks on the World Trade center.
You are correct to point out that a significant WMD attack would would be a major blow to our economy. I really lose patience with people who can’t see the difference been a car accident and mass murder.
Jim: “You are correct to point out that a significant WMD attack would would be a major blow to our economy. I really lose patience with people who can’t see the difference been a car accident and mass murder.”
I am really tempted to lose patience with people who can’t deal with statistics. Of course, a terror attack would be a terrible (and acute) occurrence. It is hard not to take such attacks personally. Responding to terrorism in such as way as to reduce its future likelihood — perhaps by _winning_ a foreign war, or improving certain security measures — is reasonable.
Regardless, internally, we have much bigger problems. 100 times more deaths via car accidents (and much more cancer and heart disease) is rationally far more important than terror. The continuous collective hand-wringing over terror policy is tiresome.
If we choose to not overreact to terror internally, we reduce both the follow-on effects and the incentive to attack in the first place.