Investment Implications of a Financial Crisis

It seems wherever we turn, all we hear and see in the financial press is what happening in Europe, and in particular, Greece. We would like to put some historical context around the current situation and discuss the investment implications. We truly feel for those affected by the current financial crisis overseas. As business owners ourselves, we have a soft spot for those individuals and companies just trying to make a living and support their families. Greece represents just 2% of the Eurozone economy and less than 0.5% of the world economy. For reasons we’ll explain below, we believe the investment implications of what is coming out of Europe is mostly just noise.

Not too long ago, there was a region of the world whose currencies suddenly and dramatically were devalued, causing a major drop in the stock markets of the countries in the region, defaults on debt payments, political upheaval, an eventual bailout by the IMF (International Monetary Fund), and the largest one day drop in our stock market EVER!

It was the Asian financial crisis that began in July 1997 – embroiling the Southeast Asian states of Thailand, Malaysia, Singapore, Indonesia, Hong Kong, and South Korea (as well as China). Over the previous decade, these countries had registered some of the most impressive economic growth rates in the world – expanding by 6% to 9% per annum, as measured by Gross Domestic Product. It was in October 1998 that the Dow Jones Industrial Average fell more than 500 points (at that time, the biggest one day point drop ever). And yet, by early 1999 (less than 20 months later), the crisis had worked itself out. Looking back on it now, it was just a blip in the global capital markets.

What is going on in Greece is in many ways similar to what happened in Latin America in the 1980s, and Asia and Russia in 1998. These types of debt crises happen on a fairly frequent basis, and the cause is always the same even though the characters change each decade. In each of these cases a country or a group of countries borrow too much money and find it necessary to take drastic steps to work their way out of debt. Lax accounting and financial standards – as well as sketchy politics usually contribute to the problem. Even the United States is not immune from such crises from time to time. The greater threat is to the Euro (the currency). Though we wouldn’t be surprised to see the Euro continue to depreciate versus the U.S. Dollar, European stocks as a whole remain attractively valued and compelling investments.

This is not to say we expect the recovery in Greece to resemble what we saw Asia – there are numerous differences. However, Greece is not going away. As we have long explained to clients, our company invests in companies, not economies. And companies can profit regardless of the local economy or the best intentions of politicians and their policies.

We wish Greece the best and look forward to visiting again soon (especially Santorini). The bottom line is that the events in Greece validate our investment strategy of managing portfolios to each client’s specific needs – while being diversified and maintaining discipline. No one knows for sure what will happen in Greece. We do know, however, that capitalism works and you should not change your long term investment strategy based on short term market conditions. We view these periodic episodes as a normal part of investing on a global basis. Periods of short term volatility should be expected – and even welcomed – because they help cleanse the global economic system and often set the stage for future growth.

By the way, what if you had the gall/ foresight/ discipline to buy a dumb old basket (or index) of stocks of these emerging Asian countries on 1/1/99 (after many of these markets had lost more than 70% of their value) and held them 16.5 years till 6/30/15 – how might you have done? Using the MSCI All World Asia Ex Japan Index as a benchmark, your investment would have increased by 334%. More than three fold in less than 17 years – pretty darn great! What about a similar investment in the Standard & Poor’s 500 Index (U.S. Large Company Stocks): 128%.

Looking forward, we remain incredibly upbeat about what lies ahead for investors. Despite what the media reports, we find many reasons to be optimistic for those disciplined investors that understand the power of time value of money, diversification, and cost/tax management. While no two financial crises are exactly the same, there are certain common threads that give us comfort that we will rise after we stumble and all be stronger for it.

To learn more about Barry Mendelson, view his Paladin Registry profile.

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