The InvestMentor

January 8, 2003

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I don’t have to use the tired story of Barnard Baruch’s shoeshine boy to make my point that the tense geopolitical situation isn’t bad for stocks, and good for gold. I have my Mom.

As many who have heard the yarn know, Baruch was a big investor 80 years ago, and knew in 1929 that it was time to get out of the market when his shoeshine boy started giving him stock tips. I don’t get my shoes shined much any more (since moving to a small mountain town and ditching formal wear for all but funerals and weddings), but I can still count on my Mom, God bless her, to bring me up to speed on the pedestrian view.

Nothing against dear old Mom--she’s just a great portal into consensus thinking in that she’s smart, follows the news closely, but has little economic or investment background. She asks good questions, and in the process, unknowingly expresses the consensus outlook for the capital markets. That’s beneficial to someone looking for investment opportunities.

The other morning she postulated that it was a good time to own gold, and also real estate, since she felt we were headed for a war with Iraq which would take the economy and stock market down. But the hypothesis fails at two levels:

1) It’s pedestrian, just like the shoeshine boy’s stock tips. By the time consensus is reached about how a global event will be played out, and its impact on the capital markets, it’s already accounted for in prices, and thus, there’s little upside left. Believe me, by the time you hear about it on CNBC, Fox News, and CNN, it’s too late. Just go back three years. Then, the public believed that we were in a “new paradigm,” that stocks were likely to grow by 25% per year perpetually, and that you couldn’t lose buying technology companies. The same malarkey is being spouted about gold and real estate today. A very ominous sign, indeed.

2) Iraq is not an economic event. The direct cost is minimal on a $10 trillion economy. And the impact on consumption? Well, our true “consumer confidence” is manifested in spending behavior, and it’s been undisturbed by September 11th, anthrax scares, snipers in Virginia, and a war in Afghanistan. Why should war with this second rate military be any different than last time, which took a whopping four days of troop invasions for us to end it? Recall the circumstances surrounding the American involvement in Kuwait. Our entrance in the Gulf War sparked the start of the last bull market, an eventual decline in oil prices, and the recovery of the economy from the ’89-’90 recession.

Believe me, I wish successful investment were as easy as following things that make common sense, and that are affirmed on TV by bright sounding people. Often, the exact opposite turns out to be the real investment opportunity. In that vein, the way to “play” the emasculation of Saddam Hussein is to avoid gold and real estate, and favor domestic stocks and the US dollar.