Investors Will Lose at Patriot Games
In the days following the Sept. 11 attacks, a call to financial arms echoed across the country.
In a quintessentially American response to the attacks, politicians and pundits voiced sentiments similar to those of Vice President Cheney, who encouraged Americans to "stick their thumb in the eye of the terrorists and ... not let what's happened here in any way throw off their normal level of economic activity."
Joining in were some Wall Street figures, who admonished Americans to "summon the patriotism to buy stocks," as Larry Kudlow, CEO of Kudlow & Co. and syndicated columnist, wrote shortly after the attacks.
The "patriotic investing" sentiment gathered momentum during the stock market's closure from Sept. 11 through Sept. 16. A grassroots email campaign spread the (literal) rally cry.The idea received considerable attention, but subsequent market action showed there was no broad support for it. While patriotism might have influenced some investors' behavior, the dollar and U.S. stocks fell swiftly and steadily in the days after Sept. 11. Those who invested blindly for patriotism's sake lost money. It's a lesson worth remembering as the war on terrorism continues and possibly expands into Iraq. "We are fiduciaries for our clients and are going to have to act in their best interest, not throw money at the market because it's a patriotic thing to do," said Brett Gallagher, head of U.S. equities at Julius Baer Asset Management. Gallagher, who oversees about $4 billion, was responding to a question about his thinking a year ago and potential future geopolitical events. Most investors, individuals and institutions followed a similar credo after Sept. 11.
Emotions in MotionWhen trading resumed on Sept. 17, the Dow Jones Industrial Average suffered its worst point decline in history, although its 7.1% drop was not among its 10-largest percentage declines. The New York Stock Exchange set a then-record level of volume at nearly 2.4 billion shares, while declining stocks swamped advancers by 7 to 1.
Finer Points LostKudlow defended his call to patriotic investing in a recent interview: "At the moment the [planes] hit and destroyed those buildings, it was clear these people were trying to strike at our economic system of market capitalism. Since the stock market is a symbol of that, to buy and shove it in Osama [bin Laden's] face -- I thought if people could do it, they should." Victory Capital's Farrell was another of the high-profile market figures who became associated with the same theme. During a Sept. 13 appearance on CNBC's Squawk Box, he said, in response to a question about what Fed Chairman Greenspan and other policy makers could do to support the market: "Just appeal to all of us, a basic patriotism, that speculators speculate tomorrow. Don't speculate today. Let's stand together." On Sept. 18, The Wall Street Journal quoted Farrell as saying he'd be buying shares of IBM
Here and NowOn Sept. 18, 2001 I wrote that patriotism is a poor investment guide, and stand by that argument. Investing based on emotions -- and patriotism is almost pure emotion -- is almost always a mistake. Giving to charity -- which Americans did in huge numbers after Sept. 11 -- seems far more appropriate than blindly throwing money at equities. Last December, investors were offered another alternative when the Treasury Department -- after initial reluctance by Secretary O'Neill -- approved the sale of so-called Patriot Bonds. However, these modern equivalent of War Bonds are similar to other Series EE bonds in every way except name. "Proceeds of all Treasury borrowings go into the general fund" and Congress then decides how the money is appropriated, explained Peter Hollenbach, a spokesman for the Bureau of Public Debt. "There is no discussion of [offering] securities earmarked" for the Defense Department and/or the Office of Homeland Defense. That's unfortunate because there's an opportunity for the government to marry the desire of many Americans to make a direct financial contribution to the war effort and the financial strains on the military; just last week The Wall Street Journal reported on the Navy's cash flow shortage. I suspect many Americans would be willing to sacrifice a few basis points of yield to purchase bonds that assure a direct connection between their investment and the war effort. That is a patriotic investment worth supporting for the intent, and the returns would be well defined.
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