Hello everybody, it's Sam from Financial Samurai. There's this great quote from Lenin that says, "There are decades where nothing happens, and there are weeks where decades happen." And that's how I felt last week when the war broke out in Ukraine. And it's a terrible feeling because there's so much uncertainty, there's so much sadness, and there's so much anger that something like this could happen today.

And there's also frustration because here in the United States, there's nothing you and I can do about the situation except to stand in solidarity with the Ukrainians. And as a parent right now, I just can't imagine having to flee San Francisco to find shelter and then take my kids out of school, leave my house behind, and so forth.

So it's a really harrowing situation that I hope gets swiftly resolved. Otherwise there's going to be a humanitarian crisis. If you haven't realized it by now, black swan events happen all the time. They happen so often we might as well get rid of the term altogether. Financial Samurai was born out of a black swan event, the global financial crisis of 2008 and 2009.

I had come up with Financial Samurai in 2006 after graduating from business school. And only after a financial crisis that was the worst in history that I say, "Okay, you know what, time to stop diddle-dalling, time to start this project that I've been thinking about for so long." So this site's DNA will always contain a cautionary strand or two because if you've ever lost a lot of your money very quickly or your livelihood, such as if you got let go and you couldn't find work for years, you will never want to repeat that experience again.

So a lot of people over the years have said, "Sam, you write so cautiously. You always talk about these black swan events that aren't going to happen." But come on folks, since 2009 there's been a lot of things happening if you're paying attention and if you have real money at stake.

I mean, yeah, if you have several thousand dollars invested and things go down 30%, 50%, it's okay. But if you have hundreds of thousands of dollars, millions of dollars, kids to take care of, parents to take care of, there's no messing around here. There really is no messing around.

Money is too important to be left up to pontification, which is why I try to write and speak from firsthand experience. I am an ongoing student of finance. No matter how much I write, how much I speak, there's always something new to learn. And here are five observations since the start of the war.

The first financial observation is this. Cryptocurrencies are not a defensive asset. There has been some debate regarding whether cryptocurrencies like Bitcoin and Ethereum are defensive assets. One idea is that as the US dollar loses its purchasing power, cryptocurrencies will eventually rise up and replace it. The thing is the US dollar has appreciated since the pandemic began in 2020 and the war began, not depreciated.

We're talking about a 5% appreciation in 2021 against a basket of currencies for the US dollar. So the US dollar really isn't going anywhere. We approached the pandemic better than most countries. Further, our stock market did better than most countries. We're also a world reserve currency. So the US dollar is not going anywhere.

So the idea that the US dollar depreciates to zero is probably not going to happen, right? And when it comes to finances, everything is relative. So yeah, you could bash the US dollar, but if other countries and other currencies are not doing as well, then the US dollar is doing relatively well.

So in the morning when we all found out that Russia was going to invade Ukraine, gold surged higher and then Bitcoin collapsed. And then once the stock market started turning around intraday, gold started rolling over and then Bitcoin started shooting up. So bottom line is don't buy cryptocurrencies to hedge against a downturn.

Buy them for more beta on the upside. Gold works as a much better hedge during times of uncertainty. Cryptocurrencies should continue to be viewed as highly speculative investments with high beta. The second financial observation is that uncertainty kills the market. Fear of the unknown is one of the biggest negatives for the stock market.

The greater the speculation about a Russian invasion of Ukraine, the more the stock market sold off. And then only when the invasion actually occurred, did the stock market finally turn around and rally. So we can all feel that uncertainty unfold in our bodies if we were paying attention up to the invasion, right?

The uncertainty creates anxiety, a lot of what-if scenarios in our heads. You know, a lot of us think about worst case scenarios. And then when you start thinking about worst case scenarios, you might end up doing things to prevent that worst case scenario from happening. But usually the things in our head, the fears in our heads, generally are much, much worse than reality.

This is one of the key things that I realized when I left my job in 2012. Before you leave your job, you think, "What if you run out of money? What if you starve to death? What if you are thrown out on the streets?" A lot of things that could happen but likely aren't going to happen.

So as a result, it's a real mind bender before you take a leap of faith and do something completely different. And this is why I want to constantly remind you folks that financial independence and doing things that you want to do is not just math. It's not just math at all.

Math is maybe 30 to 40% of the equation. Your mental strength, your mental health really is the majority of your ability to change your life. So besides the fear of an invasion, here are other uncertainties that may hurt stock market performance to varying degrees. Concern over the magnitude and the number of rate hikes by the Fed.

Since the invasion began, the expectations for the number of rate hikes have gone down. The expectation that the Fed will hike by 50 basis points in March has also come down. Two, fear over the outcome of a presidential election, especially if the potential candidate has some very extreme views.

Concern over a reduction in government benefits. Worry over a new tax hike or change in tax policy. Fear over the impact of a new deadly virus. And fear that this war could get out of hand and create World War III. So these fears are going to put a lid on stock market performance.

The more we know about an outcome, the more we can take steps to deal with the outcome. However, if you really want to benefit, you've got to take a chance. You've got to take action before that outcome is known because once that outcome is known, it's going to be too late.

Here's the third financial observation. Extremely powerful and wealthy people are willing to detonate their finances for their ideology. So in some circles or in some estimates, Vladimir Putin is worth over $200 billion. However, Putin was willing to detonate the Moscow Stock Exchange in order to go to war. So on Thursday, February 24th, the day of the invasion, the benchmark Russia index closed down 33%.

That erased $189 billion in shareholder wealth. And given Putin is a very wealthy man, he certainly lost a lot of money. Meanwhile, the S&P 500 closed up 1.5% for the day. How's that for a juxtaposition? This is the first time since 1987 that a sell-off of this magnitude has hit a market worth more than $50 billion.

In the aftermath of the Black Monday crash that year, Hong Kong's Hang Seng index tumbled 33%. The worst single day drop over the past century in any market of any size was Argentina's 53% slump in January 1990, when the country was battling hyperinflation and a mounting economic crisis. So the Russia index, the MOEX, trades at roughly 3 to 3.5 times forward earnings.

That's it, folks. And that's down from 5.4 times at the start of 2022. Whereas the S&P 500 is trading at 20 plus times earnings, forward earnings. So this discount in valuation reflects a risk premium that people aren't willing to pay a higher earnings multiple when there's so much uncertainty.

Sure, there could be a lot of upside if that uncertainty is removed. Let's say there's a more democratic environment, better measures are put in place, checks and balances. However, let's not count on that. Therefore, you should probably continue to overweight developed countries with highly functioning democracies. The fourth financial observation is that compared to stocks, real estate is an oasis during a war.

Obviously, cash is great as well. If you own both stocks and real estate, as most of us do, think about the amount of time you spent worrying about your stock portfolio versus your real estate portfolio during the onset of the war. Be honest with how many times you checked your stock app and logged into your online brokerage account before and after the invasion began.

Now think about how many times you thought about how your real estate portfolio was doing. Did you really even care? If you're like most people, you probably worried much more about your stocks than your real estate. It's only if you own real estate in a country that is being invaded where you begin to worry.

Depending on if the invading country wins and how aggressive they are, you could lose your property rights under a new regime change. If you tend to be a more anxious person, stocks may not be for you. And if you decide to own stocks, even though you're highly anxious, you need to figure out the appropriate net worth exposure percentage that you aren't feeling distraught with the urge to panic sell anytime there's a big downturn.

I talk about this with the financial seer formula. And essentially, you want to equate your potential losses to how many months you would need to work to make up for those losses. So I'll link to that post in the show notes. But at the end of the day, money is time.

And the older you get, the more valuable your time will get. And therefore, the more valuable your money will be, and the more you'll want to protect your capital. If you are feeling particularly jittery or moody during the latest war or geopolitical event, then you should probably lower your stock exposure.

And on the other hand, if you've gone about your business without feeling any stress, you didn't check, you just kind of were happy go lucky, then you should probably increase your stock exposure. Only you will know how you feel. So figure it out. The fifth and final financial observation is that big intraday reversals haven't proven to be good omens.

When the Russian invasion began, the NASDAQ began the day down 3.29%. It then ended up the day positive 3.36%. The S&P 500 started the day down 2.59%. It ended the day up 1.5%. These are massive reversals. However, when you look at history, when the NASDAQ had a plus 5% intraday reversal from the open, they all happened during the 2000 tech bust.

And they happened multiple times between 2000 and 2002. And then it happened again during the housing crisis, right? In 2008, 2009. So in other words, they all happened during bear markets. I clearly remember the 2000 dot bomb starting in 2000 because I started working in finance in 1999. There were a lot of false hopes, many, many false hopes.

The first couple of years, ah, things will be OK. Things will be OK. And after about a year and a half of declining, we just kind of capitulated and said, you know what? Things are not OK. And it was just, OK, the denial was just acceptance that we weren't going to make money in the NASDAQ and in technology stocks.

Any longer. And then after about three years, right, starting in around 2003, things got a little bit better. But after topping in 2000, the NASDAQ really didn't reach that level until about 2015, 2016. So that's over a decade of waiting to get back to even. Now, currently, things are correcting much, much quicker.

You're seeing a lot of the tech stocks correct by 60 to 80% in just six months. So the cycle of change is much quicker now. The velocity is very quick. However, I wouldn't look at these huge reversals as something of a good omen just based on history. I would just continue to have a lot of skepticism about the latest turnaround.

There will undoubtedly be more volatile times ahead. So those are my five financial observations since the start of the war. I'd love to hear what your observations are. There is also one final point that is something worth thinking about. A war could ignite a bull market. If you look at history, during a recession, governments tend to spend and print more money to get their economies going again.

For example, on May 6, 1935, President FDR issued Executive Order 7034 establishing the Works Progress Administration. Over its eight years of existence, the WPA put roughly 8.5 million Americans to work helping America get out of the Great Depression at the time. And during a war, there's heightened military spending that creates employment and additional economic activity.

Also more money may be spent on innovation and technology that can carry through to the economy. However, there's obviously a cost to many other industries as well. The jury is still out on how a war affects financial markets long term. Here are some points on how war might actually help the stock market.

One, it makes the Fed second guess their rate hike plans, which could help spur further borrowing. Two, it attracts more treasury bond buying, which helps put a lid on rising interest rates. Three, may reduce consumption froth and reduce inflation as more people hold on to cash and spend less.

Four, it encourages more nations to collaborate, creating more opportunities for international trade. A lot of good comes out of darkness, generally. Think about a lot of the companies that were formed in 2008, 2009, and 2010. And then finally, it might motivate more people to spend more money on goods and experiences, given we realize that wars, pandemics, all of these things are proving that life is quite ephemeral and quite fragile, that we might as well spend more of our hard-earned money and live a better life.

Thank you all for listening. Let us pray and hope this latest conflict will resolve itself quickly and peacefully. Please spend some time reaching out to friends, hugging your loved ones and your children, and just cherish them. Cherish every single day. Thanks so much, and take care.