The Greek Tragedy and Investing

Ongoing financial woes in Greece remind us we live in a world of uncertainty. Currently Greece is the lowest credit rated country in the world. “Global Economic Collapse” has been the byline of choice when the media has reported on this story since 2009. Newsvendors have pulled all stops when it comes to connecting the dots between the possibility of Greece defaulting on its debt and worldwide economic disaster.

If raising angst in investors is the intent of the media, it has done a fine job. I’m asked at least 3 times a week about what might happen if Greece does this or that. The root of these questions is the fear that whatever the ifs ands or buts, the result will be a negative impact on our investments.

Here are some things of which I am certain: We cannot know in advance how any crisis will affect anything or for how long, including the value expressed on our investment statements. Moreover, from a larger view, this news item is the epitome of risk– which is the very nature of investing. If stocks, bonds, countries, economies, etc., did not experience risk and volatility, there would be no premium over time for investing in them. If that were the case, no one would do it. See if this sounds familiar:

Economic Risk: “In financing a project, the risk that the project's output will not generate sufficient revenues to cover operating costs and to repay debt obligations.”

12 years ago this perfectly defined Brazil. It teetered on economic ruin that, given its global energy contribution, could have create a far greater problem than Greece threatens. Now we see that Brazil has turned into a major economic player and its stock market has had the highest returns of any other since that time.

But back to Greece. As for the things I’m not certain about… but still seem reasonable: As a global economic player, Greece is quite small. The total debt outstanding is 432 Billion in U.S. dollar terms. Compared to the near failure of a single company in 2008, AIG, this isn’t particularly scary. When compared to the size of the entire problem at the time, this amount would hardly be worthy of a conversation.

If I am to buy into the potential catastrophe as described, the possibility of default has the world teetering on bankruptcy. The European Nations, U.S., China, Japan, Canada, Brazil…and so on are going to be blown out of the water by this. I’m not saying it is desirable and won’t create problems, but topple the global economy? Really?

Since 1973 there have been 15 major financial crises that affected the markets. What follows leaves out a number of political, currency, commodity, wartime, and other crises:

1973: OPEC strangles energy supply. Oil prices surged out of sight leading to the worst bear markets since the depression.

1980’s: The Latin America Debt Crisis. This crisis threatened to bankrupt many major US banks.

1984: Continental Illinois and National Bank became insolvent. This threatened to create a run on U.S. banks.

1987: The DOW dropped almost 25% in a single day. The largest one-day drop in the history of the market.

1989-1991: The Savings & Loan Crisis. 747 S&L institutions (banks) failed.

1990: The Japan Bubble and Collapse. Japan has still not fully recovered.

1990: The Scandinavian Banking Crisis. Created a dismal impact on Sweden, Norway and Finland.

1992: Black Wednesday. The Bank of England had to withdraw from the European Exchange Rate Mechanism due to speculative attacks on the British pound.

1994: The Mexico Peso Crisis. The US had to lend money to Mexico to prevent the country from going insolvent.

1997: The Asian Contagion. Banking devaluations ran rampant across Asia.

1998: The Russian Stock, Bond and Currency Collapse.

1998: The Long Term Capital Collapse. The Federal Reserve had to step in and provide a bailout to prevent another collapse and contagion.

2000: The DOT COM Bubble Burst.

2001: 9-11. Leading to a wartime market, this began with the literal collapse of the center of the Global Financial Mechanism.

2007: The US Financial Crisis.

The lesson is that crises, volatility, and yes, risk are NORMAL. Stated most simply, the volatility endured from this normalcy is where returns higher than CDs and T-bills come from. Those that realize this “risk adjusted” premium are those that have a clear investment strategy that does not deviate when media speculation paints a dismal picture.

The number of people able to alter their strategies around such events to further profit is so small, there isn’t a single book written about them as a whole. But there are hundreds of books discussing the success of those who look at risk, prudently diversify into it, hold fast, and succeed.

In closing, it is interesting to note that from 1970 to April 2010, the S&P 500 returned 10.0% per year and the EAFE returned 10.1% per year.

I welcome your comments.

Warmly,

Marc Becker