World War I

World War I (also known as the Great War) was a cataclysmic global conflict from 1914 to 1918 that did more than just redraw political maps; it fundamentally reset the world's financial order. For investors, it was a brutal, real-world stress test that shattered the long-held belief in a stable, globalized economy centered in Europe. The war triggered market panics, shuttered stock exchanges for months, and unleashed unprecedented levels of government debt and inflation. It marked the dramatic transition of the United States from a debtor nation to the world's dominant creditor, setting the stage for the rise of the US Dollar. Understanding the financial shockwaves of WWI isn't just a history lesson; it's a masterclass in risk management, the dangers of inflation, and the profound impact of geopolitical events on long-term wealth creation. It taught investors the hard way that the seemingly impossible can happen, and that the bedrock of the financial world can crack overnight.

When war was declared in the summer of 1914, the financial markets' reaction was immediate and severe: pure panic. Fearing a massive sell-off as European investors liquidated their holdings to fund the war, authorities took a drastic step. Exchanges across the globe, including the London Stock Exchange and the New York Stock Exchange (NYSE), closed their doors. The NYSE remained shut for over four months, the longest closure in its history, to prevent a complete market collapse. However, once the initial shock subsided and the markets reopened, a different story emerged. The war created enormous demand for certain goods, leading to a “war boom” for specific industries. Companies in sectors like steel (for ships and shells), chemicals (for explosives), and agriculture (to feed the armies) saw their profits and stock prices soar. For instance, the stock of American industrial giant DuPont skyrocketed as it became a primary supplier of gunpowder to the Allied forces. This period starkly illustrated how capital is reallocated during major crises, creating both big winners and big losers.

The chaos of WWI offers timeless lessons that are central to the philosophy of Value Investing. It demonstrated how quickly value can be destroyed and where it can be found and preserved amidst turmoil.

Before 1914, the world's financial center was London, and the British Pound Sterling was the undisputed global reserve currency. The war changed everything. European powers, particularly Great Britain and France, financed their war efforts by selling off their vast overseas investments and borrowing heavily, primarily from the United States. Over four years, the U.S. transformed from the world's largest debtor into its largest creditor. Capital, gold, and economic power flowed west across the Atlantic. This seismic shift cemented America's economic dominance for the century to come and was a key lesson in how long-term geopolitical trends can fundamentally alter investment returns for decades.

To pay for the immense cost of the war, governments resorted to two main tools: borrowing on a massive scale and printing money. This combination was a perfect recipe for a dramatic loss of purchasing power. While most countries experienced severe inflation, the most extreme case was Germany, which, burdened by war reparations, descended into catastrophic hyperinflation in the early 1920s. Citizens saw their life savings in cash and bonds become utterly worthless. This serves as a powerful reminder for value investors: the nominal value of money is not guaranteed. True value resides in real, productive assets—factories, infrastructure, and strong businesses—that can weather inflationary storms, not in pieces of paper whose value can be inflated away by governments.

The Great War is a historical case study packed with practical insights for navigating modern markets.

• Expect the Unexpected. WWI was a textbook Black Swan Event—a low-probability, high-impact event that no one saw coming. It teaches us that markets can be disrupted in ways we can't imagine. This underscores the importance of building a resilient portfolio and always investing with a Margin of Safety.
• Diversify, Diversify, Diversify. The war completely wiped out investors who had their capital concentrated in the Russian, Ottoman, or Austro-Hungarian empires, as these political entities ceased to exist. This is a brutal lesson in the necessity of Geographic Diversification. Don't put all your eggs in one country's basket.
• Own Businesses, Not Just Cash. In the high-inflation aftermath of the war, holding cash was a guaranteed way to lose wealth. The winners were those who owned shares in durable businesses with real assets and the ability to raise prices.
• Governments Change the Rules. The war ushered in an era of greater government intervention in the economy, from taxation to regulation. Investors must always be aware that the political landscape is a critical, and often unpredictable, factor in investment outcomes.