A Survival Guide for Investors Facing War

Israel abruptly launched an attack on Iran (according to Bloomberg, an operation that had been in preparation since last November), and Iran immediately struck back, triggering a war between Israel and Iran. Because the conflict has only just begun, it is extremely difficult to predict how events will unfold.

However, according to early reports, local Israeli media are so far describing the operation as a success. Israel claims to have killed 12 of Iran’s nuclear scientists and senior military officials, inflicted serious damage on key nuclear facilities, and constrained Iran’s ability to retaliate. On Friday night, Israel announced that it had struck yet another nuclear facility, this time in Isfahan.

Since the late 1990s, Israeli Prime Minister Netanyahu has argued that no threat to Israel compares to Iran. Iran denies the legitimacy of Israel as a Jewish state, has enriched uranium and developed ballistic missiles, and has armed anti-Israel forces across the Middle East.

During his previous terms as prime minister in 2010 and 2012, he also sought to launch military strikes against Iran’s nuclear program, but both times the plans were shelved at the last minute. His security chiefs, key cabinet members, and then–U.S. President Barack Obama opposed the move. Today, however, his aides and major ministers are giving him full support. Trump says publicly that he backs negotiations with Iran, but Israel’s sudden attack is unlikely to have gone ahead without his approval.

Given Israel’s military capabilities, it lacks the capacity to completely eliminate Iran’s nuclear facilities without U.S. assistance. Netanyahu therefore argues that this operation is more about delaying Iran’s development of nuclear weapons than making it impossible, and that to stop it entirely, Trump must either proactively order U.S. military intervention or a comprehensive agreement must be reached.

The first rule investors must keep in mind during a geopolitical crisis is to not panic. As the data clearly show, from the perspective of investors holding positions for more than a month, most geopolitical events have almost no impact on equity-market returns.

Let’s say it again: “No panic!”

And resist the urge to rush out and sell your stocks. On average, the right response in a geopolitical crisis is not to sell, but to buy risk assets that have plunged.

When a crisis erupts, investors tend to overextend what has just happened across the past and future, imagining scenarios in which “a clash will soon escalate into a world war.” At such times, the “geopolitical experts” who appear on TV and in newspapers stoke fear by predicting World War III, a 1970s-style oil shock, and stagflation.

But these “end of the world” warnings mostly rest on the assumption that the crisis will spiral out of control into a full-scale war. Historically, that has been extremely rare. Over the past 150 years, there have been only two cases in which war truly spun out of control: World War I and World War II.

By contrast, there have been countless local wars and conflicts that “could have turned into World War III.” The Korean War, the Vietnam War, the Cuban Missile Crisis, numerous Middle East wars, tensions between nuclear-armed North Korea and its neighbors, the civil wars that broke out during the Arab Spring in 2011…. Yet most of these remained under control. The reason is simple: people want peace and do their utmost to avoid war. For a conflict to escalate, both sides have to make enormous miscalculations. One “mad dictator” is not enough; you need two, or one dictator combined with appeasement on the other side.

Once you’ve taken a deep breath and calmed your pulse and blood pressure (remember: don’t panic), it’s time to analyze the situation and act.

In DCF analysis, you should assume a higher inflation rate and a lower earnings growth rate. Although equities are generally considered “real assets” and thus an inflation hedge, once inflation exceeds 4%, companies struggle to fully pass higher costs on to consumers, and margins come under pressure.

In DCF analysis, it is advisable to revise real interest rates upward and earnings growth downward.

Research backs this up. When the pattern “geopolitical shock → sharp equity sell-off” appears, the default response is to buy.

Only when you see confirmation of “permanent effects” such as persistent inflation, rising real rates, or prolonged earnings declines does it make sense to consider some selling. Short-term earnings downgrades over a quarter or two are just noise.

When the crowd is casting its votes by rushing for the exits, a skilled investor weighs value and acts accordingly.