One of the more influential investors of the 20th century, Philip Fisher, describes in his book “Common Stocks and Uncommon Profits” the history of stock markets during outbreaks of war. He notes that during the onset of all the major wars of the 20th century (until the book was published in 1958) panicked stockholders sold off shares driving the stock market down immediately or shortly thereafter. World War II was the shortly thereafter exception, as the U.S. was profiting from arms sales during the war, but the market would later decline after several German victories. Fisher describes wars as being “bearish on money.” He wrote that modern wars necessitated massive government spending; more than could repaid through future taxation. Thus a major bout of inflation would likely be the consequence. So the notion of selling stocks for cash is what he describes as “financial lunacy.”
Certainly there is some logic to the last point, but should stocks necessarily perform well during a major conflict? Surely it depends as some companies have even thrived during world wars. State Farm, for example, saw its profits grow during World War II. The company, which sold automobile insurance, saw its policy renewals drop off only marginally in the early period of the war, but its claims fell at a much higher clip thereby raising its profitability. Circumstances changed after the war as soldiers returned to civilian life along with their dilapidated automobiles.
Dow Chemical (DOW, Financial) is another example. The company was primarily a seller of chemicals such as bromine which were used for photography and various dyes. But during World War I the Germans, which had their own chemical giants, initiated chemical warfare against the U.S. Prodded by the U.S. military, Dow first developed gas masks to protect U.S. soldiers against chemical attacks, but later was instructed to develop mustard gas for use against the Germans. These were not very profitable years for Dow, but it did allow the company to grow its operations and blossom into a giant in the chemicals business.
Of course these are the companies that are still around, and we don’t get the story of the companies that did fail during major conflicts. I imagine highly leveraged companies that barely cover interest payments would be another casualty of war. But both Dow and State Farm were two exceptional businesses which drew their edge from their cost leadership position. Dow was able to produce chemicals much cheaper than its German counterparts. State Farm was organized as a mutual insurance company, availing itself of a lower cost structure than the incumbent insurance companies.
The question is not will there be another major world war, but when? It would be an optimistic view to hold that such an event would not happen anytime in the future. But if history is a guide, major conflicts should be no less probable than jaw-dropping stock declines. The Economist describes in an article a pattern that conflicts follow. They write that wars follow a power law distribution and they opine that major wars of the 20th century were not highly improbable events, but conflicts that should occur occasionally. It’s certainly an unpleasant view, but it’s a possibility that should considered.
Josh Zachariah
Certainly there is some logic to the last point, but should stocks necessarily perform well during a major conflict? Surely it depends as some companies have even thrived during world wars. State Farm, for example, saw its profits grow during World War II. The company, which sold automobile insurance, saw its policy renewals drop off only marginally in the early period of the war, but its claims fell at a much higher clip thereby raising its profitability. Circumstances changed after the war as soldiers returned to civilian life along with their dilapidated automobiles.
Dow Chemical (DOW, Financial) is another example. The company was primarily a seller of chemicals such as bromine which were used for photography and various dyes. But during World War I the Germans, which had their own chemical giants, initiated chemical warfare against the U.S. Prodded by the U.S. military, Dow first developed gas masks to protect U.S. soldiers against chemical attacks, but later was instructed to develop mustard gas for use against the Germans. These were not very profitable years for Dow, but it did allow the company to grow its operations and blossom into a giant in the chemicals business.
Of course these are the companies that are still around, and we don’t get the story of the companies that did fail during major conflicts. I imagine highly leveraged companies that barely cover interest payments would be another casualty of war. But both Dow and State Farm were two exceptional businesses which drew their edge from their cost leadership position. Dow was able to produce chemicals much cheaper than its German counterparts. State Farm was organized as a mutual insurance company, availing itself of a lower cost structure than the incumbent insurance companies.
The question is not will there be another major world war, but when? It would be an optimistic view to hold that such an event would not happen anytime in the future. But if history is a guide, major conflicts should be no less probable than jaw-dropping stock declines. The Economist describes in an article a pattern that conflicts follow. They write that wars follow a power law distribution and they opine that major wars of the 20th century were not highly improbable events, but conflicts that should occur occasionally. It’s certainly an unpleasant view, but it’s a possibility that should considered.
Josh Zachariah
