I was in Italy last week for an investment conference. While I was there, investors in the market started to get very scared that Italy would be the next financial casualty after Greece, and there was a large sell-off in Italian bonds.
At the conference, no one even mentioned this news. I have no doubt they heard the news but they simply were focused on buying good stocks at cheap prices.
Think back to Germany in 1945. The country was under military occupation, divided between the Soviets, the French, the British and Americans. The economy and infrastructure were in total shambles as a result the brutal war which Hitler unleashed on the world only six years earlier. At the same time, Japan was also trying to recovery from the horrors of war.
Who in their right mind would buy German or Japanese stocks in 1945? Obviously, you had to be out of your mind to take such a risk.
Additionally, there was the risk of an all-out nuclear war between the United States and the Soviet Union; such a war would completely wipe out Germany.
As it turned out, the people who acted on that crazy idea retired very comfortably.
If you invested in Japan in 1949, you would have had a 1,565 percent return by 1959. If you invested in the Frankfurt exchange in Germany after it re-opened in 1949, you would have made a 4,095 percent return in 10 years.
The returns over the next decades were also spectacular and continued to this day for Germany.
What are the lessons for investors today?
Even if it literally is the end of the world from, it might be a great time to buy stocks. Without getting too detailed about the possibility, let’s say the debt ceiling isn’t raised, the United States defaults on its debt and there is a worldwide depression.
If your time horizon is long enough, it might be a good time to buy equities if the financial system collapses (besides, even if it really is the end of the world, gold held in a vault in Zurich won’t be of much help to a small investor in Texas).
Don’t listen to all the doomsdayers who say sell even more as the economic news gets worse — that is exactly the time to buy.
In fact, if the United States did default and then decided to wipe out its debt load (although this is highly unlikely and would hit domestic Treasury investors hard), the United States would be like a company coming out of bankruptcy with a completely clean balance sheet.
America has favorable demographic trends, and as Warren Buffett constantly says about America, “This country works.”
The economy would be able to grow at normal rates and take on a bit of debt without worrying about any debt ceiling or default. Foreign investors would likely buy distressed Treasurys, dollars, real estate, and U.S. equities, which would help speed the recovery of the nation and global economy.
That is why no one at the conference was too concerned about the risk of an Italian default.
It might be bad temporarily, but if one focuses on picking out good stocks at cheap prices and has the capacity to see their portfolio decline 80 percent to 90 percent without selling, it matters little as to what happens to the economy.
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