Equities and terrorists

[oldcrowcall]

Should the possibility of a terrorist attack on US soil have any influence on asset allocation in a retiree's portfolio?

 

[charlie]

I think I might avoid any REIT that specializes
in high rise office buildings in major cities.

Regards,

Charlie

 

[unclemick]

The old saw - buy on bad news sometimes works depending on the bad news of course.

After 9/11 - my doggie dog - con ed took a hit so I bought more AND before that with the 99-2000 interest rate jump, they really took a hit - bought a lot more. 10.75% yield on original $ with div.s reinvested via DRIP.

SOooo - bad can be good -Sometimes - er ah maybe, heh,heh depending on the bad news of course.

 

[wabmester]

I liked that idea the pentagon had: let people place bets on terrorist events. Probably the best way to calculate the odds, timing, and magnitude of something happening (especially if insider trading is encouraged).

I'd have to guess that the odds of a terrorist event in the next year that could cause the market to take a big hit is greater than 50%. I'd also guess that the odds of the stock market making significant gains within the next year is less than 50%. So, if I were a betting man, I might sit on the market sidelines for a little while.

 

[Nords]

Sure.  Uh-huh.  Yup.

Sure, Old Crow, and you'll also have to consider the catastrophic effects of:
- nuclear accidents
- global warming
- breakup of the polar ice caps
- meteors
- bad winter weather
- Bush actually winning a presidential election
- a process for creating gold synthetically
- artificial diamonds (oh, wait, that's already happened).

Maybe I'm letting my sarcasm get away from me, but the point is that you can't effectively assess the probability of these events-- let alone plot them on a risk/returns graph.

Buffett has stated that a nuclear terrorist incident will almost certainly happen. However the only effect on HIS portfolio is that General Re won't take that insurance risk.

By the "terrorist attack" logic, we'd all be burying gold coins in our backyards. But how much? What type of gold?

Two recommendations:
(1) Do whatever helps you sleep at night.
(2) Read Bernstein's "Retirement Calculator from Hell" at http://www.efficientfrontier.com/ef/998/hell.htm .

Now if you'll excuse me, I'll be doing a little "yard work". We bought this house four years ago after the owners' deaths. It's just occurred to me that no one has swept the grounds with a metal detector yet!

 

[cute fuzzy bunny]

To heck with the metal detector.

When I bought my mcmansion, I was the 3rd owner.

The first owners were a youngish couple that paid cash, moved in, two very expensive sports cars, hardly ever left the house but lots of visitors.

About 2 weeks after the cops moved in to the house across the street to take pictures and write down license plate numbers, they vanished and never reappeared. The house was sold at auction to the people I bought it from.

Dont think I didnt consider spending a couple of days poking around up in the attics with a stick...

As far as terrorist attacks. I think the most likely to occur is a dirty bomb made with cesium, cobalt or some other highly nasty metal. The pentagon agrees with me as they just issued a report on this recently. Some of these metals are already in a talc fine powder state and are readily available in food irradiators and medical equipment. Until very recently most of these machines could be bought by anyone, and the busted, out of service ones could be had fairly inexpensively. Even today many are still available to buy on the open market, and hundreds of pounds of these metals could already have been purchased.

Just a few ounces of one of these metals, dispersed by a small to medium explosion, ideally aerially, could render manhattan or DC unlivable for a very, very long time and produce long term health risks in anyone who breathed or touched even a single spec.

The damage would be in the trillions. The cost, a few hundred bucks and a cessna.

Briefcase nukes dont scare me. Hard to get, hard to maintain, hard to smuggle in...not impossible but pretty hard.

Viruses and other sorts of things that would affect huge pieces of property or large numbers of people have similar problems.

I think any terrorists that try to take over a plane from now on better round off the edges of their box cutters because they're going to very quickly become suppositories.

But the biggest danger from terrorists is the costs and limitations we impose on ourselves to win an unwinnable fight and stop an unstoppable enemy.

As far as investing and terrorists, it can come anytime, anyplace, and have any impact. The good news is that this may raise the risk premium on equities. The bad news is that threat of loss is even less predictable and could go on for many, many decades.

 

[oldcrowcall]

Very enlightining reply. Thank you for doing it in a good spirit without any sarcasm like the previous poster. I appreciate it. I suppose some premium has already been priced in, but who knows.

 

[cute fuzzy bunny]

Eh, Nords reply is well accepted if you know him. He is wealthy with knowledge and spirit and shares both with equal generousity.

Indeed, the recent run-up we had may very well be the risk premium associated with terrorism and uncertainty in the world politican arena.

In which case my regular diatribes about overvaluation may be wrong and we're fairly priced in a market where everything and everybody in Manhattan, along with the stock markets, bank and insurance headquarters for the US and much of the world, could be obliterated in 15 minutes for less than an investment advisor wants to charge one of us for managing our money for a year...

I would further suggest that in the aftermath of the next terrorist attack, and the likely subsequent market drop, that we show our patriotism and belief in the system by buying heavily into that market.

 

[John Galt]

Of all the things I worry about (long list)
terrorism is not included. What's the point?
The chances are it will happen. The chances are
we won't stop it. The chances are it won't have a direct
impact on you personally. The Department of Homeland
Security is just another way to waste your money.
Has Tom Ridge done anything for you? I doubt it.

John Galt

 

[cute fuzzy bunny]

I call that the billion dollar sucking sound from the DC area.

Wasnt the chief intention to combine our intelligence gathering, national criminal investigative and anti terrorist organization under one roof? You know, the one thing it hasnt done at all?

But we did get a pointless color coded scheme and advice on duct tape and plastic sheeting as anti biological weapon protection.
:

They actually made a very impactful decision in my old home town though. The ordered the closing of a road over a dam that holds up drinking water for a large portion of the Sacramento CA area. The argument being that a car bomb could destroy the dam and flood Sacramento. Now, our own army corps of engineers made point that dams are almost impossible to breach and that we dont even target them in times of war - and those guys have cruise missiles and bombers. They also said a car bomb would be useless and would simply scar the roadway.

The homeland security folks were nonplussed and stuck with the decision. As a result thousands of drivers have to redirect through the center of a small town, crippling traffic and local businesses. Hundreds of additional accidents per year have been measured. We will be spending hundreds of millions of dollars at some point in the next few years to further strengthen the dam and to build a cars only bridge downstream. Property values along the roads that are now choked with traffic have dropped.

Its further worth noting that the "protection" to prevent someone from driving onto the dam is a 2" metal bar with a padlock. Which could be easily driven through by a large vehicle. Oh yeah, we're also paying two guys with sidearms to sit on top of the observation tower in the middle of the dam, full time, 24x7.

Boats have full access to both sides of the dam, and there is a major air freight flight path directly over the dam. There is also a scuba school that does diver training right next to the dam on the lake side.

Like I said, we dont need the terrorists, we're doing the job fine ourselves.

 

[wabmester]

Indeed, the recent run-up we had may very well be the risk premium associated with terrorism and uncertainty in the world politican arena.

In which case my regular diatribes about overvaluation may be wrong and we're fairly priced

Now you're really confusing me. I thought higher risk premium meant lower P/E (i.e., lower stock prices).

When somebody's talking about the equity risk premium, it means that you expect a higher *yield* equivalent versus the risk-free rate. That means the E/P should be higher, which means the P/E would be lower.

High prices mean that people are paying full price, without any discount for equity risk.

 

[dex]

UncleMick,
Very good advise.
Quetion - there are many places to read about how to invest in mutual funds and stock indexes.

Where does a person get information on how to find good bonds to invest in?

 

[cute fuzzy bunny]

Now you're really confusing me. I thought higher risk premium meant lower P/E (i.e., lower stock prices).

When somebody's talking about the equity risk premium, it means that you expect a higher *yield* equivalent versus the risk-free rate. That means the E/P should be higher, which means the P/E would be lower.

High prices mean that people are paying full price, without any discount for equity risk.

Well then that really sucks!

 

[Nords]

OldCrow & TH

OldCrow,

Apologies for the runaway sarcasm; no offense intended. But I recommend that you take a look at the Bernstein article before you change your asset allocation.

TH,

We don't need a terrorist building dirty bombs. In the mid-90s we had a Boy Scout doing it in a garden shed. Well, technically it was a breeder reactor instead of a dirty bomb...

At the time this article made the rounds of the submarine force, young David had enlisted in the Navy and was serving on a nuclear aircraft carrier, the USS ENTERPRISE.

"Luckily" he wasn't in the Navy's nuclear training program because the medical folks couldn't determine how much radiation exposure he's already had, which will certainly affect his health-care expenses and his veteran's benefits.

Come to think of it, David's enlistment must be finished by now. I wonder what he's up to? Author Silverstein alludes to a Canadian uranium ore prospecting trip...

http://www.dangerouslaboratories.org/radscout.html

http://personal.cfw.com/~rollinso/RBS.html

 

[cute fuzzy bunny]

Nords - I read that story but had forgotten about it.

Truly frightening.

 

[Michael]

But the biggest danger from terrorists is the costs and limitations we impose on ourselves to win an unwinnable fight and stop an unstoppable enemy.

I noticed that the FBI agents that were redeployed to the war on terror came mostly from the drug war division.  I suspect that they will be fighting the war on terror with the same tactics that they have been using in the war on drugs, with similar results.  Neither war is unwinnable. However, they cannot be won with poor tactics, or by alienating the common people by supporting corrupt hidden agendas.

Instead of concentrating on keeping heroin and such away from children, the drug war has been used as an excuse to keep medicine costs high, and prevent many sick people from getting the meds that they need.  This is inexcusable, and makes people lose confidence in the system.  The end result is that children can buy virtually anything they want on the street corner, but their grandparents go without some of their meds. The war on terror cannot succeed if the feds drift off into similar crazy side agendas.  People will fear giving too much power or support to the feds, because the feds will once again have shown that they cannot be trusted with it.  They have already started applying the Patriot Act to non terror causes, increasing the odds that it will not be renewed in full strength.  They just cannot seem to focus on what is most important.

Because of their poor track record, I expect the former drug warriors to fail in their new role as terror fighters.  I would expect the high probability of a succesful attack in the future.

 

[John Galt]

The best thing to do is look out for yourselves.
Anyone counting on the government (no matter
how well intentioned) to help them or defend them is
foolish. The road to Hell is indeed paved with good
intentions, and unintended consequences are as sure
as death and taxes.

JOhn Galt

 

[johnblake]

Our population is being scared into complacency. About 3,000 people were killed in the 911 attacks. 40,000-50,000 people are killed in auto accidents each and every year. (Over 10,000 innocent Iraqi civilians have been killed since the US occupation.) Why isn't there a war on traffic fatalities? It would be interesting to see estimates of the cost/life saved for both of these problems. But the terror 'war' has a major advantage, government gets more control over almost everything (domestically and internationally).

It's interesting to hear the government brag about how they are doing such a great job preventing attacks on US soil. Well, the 911 attack was 8 years after the first wtc bombing.

I find our government's reaction to be scarier, and more threatening than the threat itself.

BTW: I will not change my investments based on the threat of terrorism. I did invest in the market immediately after 911. I picked up some AMEX at $28 after the stock was hammered. I'd probably do the same after another attack.

 

[oldcrowcall]

Nord, that is ok. Your reply did make me reflect on some things. I will read the Bernstein article. Right now I am reading the 4 pillars. Interesting that everyone I talk to expects an attack on US (contra indicator?) but no one is reducing equity exposure because of it.

 

[Michael]

Why isn't there a war on traffic fatalities?

The government doesn't actually want people to drive safely, as this would eliminate a major source of income for the states (traffic tickets). Same with the war on drugs. Confiscation of "drug dealer" property is a major revenue source. Some police departments don't even have an equipment budget from the city. They are expected to outfit their departments with the profits generated by selling confiscated property.

 

[Cut-Throat]

Quote:Why isn't there a war on traffic fatalities?

Mainly because the public does not want one! - Most believe that it won't happen to them and they can control the situation (i.e. - only bad drivers get in these accidents) -

 

[johnblake]

Mainly because the public does not want one! - Most believe that it won't happen to them and they can control the situation (i.e. - only bad drivers get in these accidents) -

You are missing the point. The public didn't want a war in Iraq either, but this didn't stop the government.

 

[Cut-Throat]

You are missing the point.  The public didn't want a war in Iraq either, but this didn't stop the government.

The public was split on the war on Iraq. There is the half that follows 'W' and the half that doesn't.

 

[cute fuzzy bunny]

Let me clarify the "unwinnable" comment, because I think the war on terrorism and the war on drugs are both unwinnable, for largely the same reason: failure to resolve the basic "problem".

Drugs will continue to be brought in to this country because people want them, and are willing to pay fairly exhorbitant prices for them. Hence there will always be someone with nothing to lose who will take the risk to bring them in. Several countries have solved the "war on drugs" by attacking the root causes and resolving them, at a fraction of the cost.

Terrorism will continue to be a problem because we face an unstructured enemy that can create "terror" at low cost and with little backing or intelligence. It doesnt take much to run into a shopping mall with a homemade bomb or an assault weapon converted to fully automatic and kill a bunch of people. When we go into a hostile country and kill tens of thousands of terrorists, every member of their family, their friends, neighbors, etc all suddenly have another reason for Jihad.

The former Soviet Union and Israel have both employed highly tuned approaches to dealing with terrorism, and have decades of experience. In the case of the FSU, couple that with an almost complete lack of civil rights. Neither could successfully contain or avert even reasonably determined terrorists.

By using highly integrated intelligence, tracking down and cutting off money supplies, and attacking organized structures such as camps and even supporting governments, we can cut down or slow down the "big attacks".

However, when you've been an imperial republic running around the world meddling in the affairs of a billion people, you're going to leave a few pissed off people hanging around. Couple those with a religious fanatic or two, or a garden variety influential psychopath, a little cash, and a couple of smart people, and you get airplanes flying into buildings.

The upshot though is we're willing to fruitlessly carve into our peoples civil rights, spend trillions in wars and other means to "curb terrorism" and so forth. In the end I think we've achieved a fairly poor return on that investment. You're dealing with an enormously large class of people to whom death is an honor, martyrdom is a big plus, and who can inflict damage at will. Killing half or three quarters of them is hardly going to divert the rest.

To think that in october of 2001, world sentiment was virtually 100% polarized in support of the US, and today that polarization is nearly reversed. That inversion took some fairly masterful planning and effort...or incredible ineptitude.

 

[unclemick]

Yawn. Double yawn - my biggest worry is staying off the freeway during rush hours. More scary than terrorists any day.

De Gaul and the Norwegian widow ride on. Heh. heh