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Geopolitical Risk

07/28/2014

The Old Ebbitt Grill at 15th & New York in Washington, D.C., is one of those classic old steakhouses frequented by Congressmen, bankers, and other shady characters.  I had lunch there one day with two analysts who got into an uncomfortable argument about whether Pfizer or Merck was a better investment.  They were even quoting footnotes from the annual statements of both companies?!?!

Sitting in the political capital of the world, I was amused that the subject of politics didn’t even come up.  The best laid plans of mice, men, and analysts are easily waylaid by politicians.  That risk rises and falls, unrelated to any analysis of corporate balance sheets.

Here is the definition of Political Risk from Investopedia:

The risk that an investment’s returns could suffer as a result of political changes or instability in a country. Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policy makers, or military control.

Obviously, that risk is quite high right now, but I am not overly concerned about it.  If Russia overtly invades the Ukraine, taking the eastern half, the stock market will drop.  If Isis holds it’s position in Iraq and invades Jordan, the stock market will drop.  If Saudi Arabia issues an oil embargo due to the Israeli invasion of Gaza, the stock market will drop.  And, of course, there are other events that could cause the market to drop.

This too will pass!  I don’t recommend selling stocks and going into cash unless there is a derivatives fiasco, which I don’t see on the horizon.  Rejoice:  we still have time for uncomfortable arguments in fancy restaurants about things that don’t really matter anyway.  

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