Wealth, War and Wisdom

1. The Market Crowd's Uncanny Wisdom: Markets Outperform Experts

The only one who is wiser than anyone is everyone.

Collective intelligence. This book argues that stock markets, representing the collective judgment of diverse, independent, and motivated individuals, possess an uncanny, intuitive wisdom that often surpasses the forecasts of so-called experts. While individual investors can be irrational, the market as a whole, particularly at major inflection points, demonstrates remarkable prescience. This "wisdom of crowds" challenges the conventional wisdom that crowds are inherently mad or foolish.

Prescient signals. During World War II, global markets provided startlingly accurate signals of the war's trajectory.

• The London market bottomed in June 1940, before the Battle of Britain was won, sensing Britain's survival.
• The German market peaked in late 1941, as Barbarossa stalled at Moscow's gates, anticipating Hitler's overreach.
• The New York market bottomed in May 1942, coinciding with the Battles of Coral Sea and Midway, recognizing the turning tide in the Pacific.
  These market movements often preceded any official or expert recognition of these critical shifts.

Why markets are wise. The market's wisdom stems from its nature as a complex adaptive system where decentralized information and tacit knowledge are aggregated through price mechanisms. Unlike experts who can be biased, overconfident, or prone to "groupthink," the market's diverse participants, each with a financial incentive to be right, collectively process vast amounts of information, leading to superior long-term judgments. This makes listening to market action, especially at crucial turning points, far more reliable than heeding expert commentary.

2. WWII: A Crucible for Global Markets and Human Despair

The Second World War has long been a fascination of mine. It offers so many lessons about life, politics, financial markets, wealth, and above all, survival.

A world in anguish. The late 1930s and early 1940s plunged the world into an era of profound despair, marked by the lingering Great Depression and the terrifying rise of totalitarian regimes. The democratic-capitalist system seemed to be failing, leading many to question its viability and consider alternatives like Communism or National Socialism. This pervasive sense of impending doom cast a long shadow over global financial markets.

Aggression and terror. The period was defined by the relentless aggression of the Axis powers—Germany, Japan, and Italy—and the Soviet Union under Stalin.

• Stalin's purges, torture, and death camps consumed millions.
• Hitler's Blitzkrieg overran Europe with unprecedented speed and brutality.
• Japan's military machine conquered vast swathes of Asia, ending Western imperialism.
  These forces employed terror and violence on an unimaginable scale, creating an environment of extreme fear and uncertainty.

Impact on markets. This grim geopolitical landscape directly translated into market malaise. Stock valuations plummeted, reflecting not just economic struggles but also deep investor pessimism about the future of civilization. The constant barrage of bad news, coupled with the perceived invincibility of the Axis powers, made wealth preservation an existential challenge, testing the very foundations of financial markets.

3. Prescience in Peril: London and US Markets Sense Turning Points

The London stock market deduced in the early summer of 1940, even before the Battle of Britain at a time when the world and even many English despaired, that Britain would not be conquered.

Britain's defiant bottom. In the early summer of 1940, as the German Blitzkrieg swept across Europe, the British Expeditionary Force narrowly escaped annihilation at Dunkirk, and an invasion of England seemed imminent. Despite this dire situation and widespread despair, the London stock market plummeted to its 1932 Depression lows and then, remarkably, began to rally. This prescient bottom occurred even before the Battle of Britain was decisively won, signaling a collective belief in Britain's ultimate survival.

America's turning tide. Similarly, the U.S. stock market, after initial declines following Pearl Harbor and a string of defeats in the Pacific, made a secular bottom in late May 1942. This coincided precisely with the pivotal naval battles of the Coral Sea and Midway, which, though initially downplayed by official communiqués, marked the high-water mark of Japanese expansion. The market's rally from this point indicated an intuitive understanding that the tide of the war had turned in the Pacific.

Beyond expert opinion. These market movements were particularly striking because they often contradicted the prevailing expert and media narratives of the time. While commentators and military strategists expressed deep pessimism or misread the significance of events, the collective wisdom of investors, driven by diverse information and self-interest, accurately anticipated the strategic shifts. This highlights the market's ability to "see through a glass darkly" and discern future outcomes before the elite.

4. The Illusion of Prosperity: Axis Markets Reflect Underlying Realities

The ascent of prices was steep until January of 1941 when the market paused, but three months later there was another final vertical surge that began prior to Barbarossa. The interesting insight is that by the late fall of 1941, the Berlin market was somehow sensing that Hitler’s luck, his infallibility were fading and that Germany’s military momentum had crested.

Initial war boom. In Germany and Japan, early military successes and the conversion to war economies initially fueled a sense of prosperity and market optimism.

• The Berlin stock market soared from 1939 to late 1941, reflecting booming military production and the plunder of occupied territories.
• The Tokyo market also climbed after Pearl Harbor and early conquests in Southeast Asia, driven by the promise of a vast resource-rich empire.
  This nominal growth, however, often masked underlying economic distortions and rising inflation.

Germany's peak prescience. Despite strict state control over news, the Berlin stock market remarkably peaked in November 1941, just as Operation Barbarossa stalled at the gates of Moscow and Leningrad. This occurred before the devastating Russian winter and the full scale of the Soviet counterattack became apparent, suggesting investors sensed Hitler's overreach and the limits of German military momentum. This prescience was a stark contrast to the official propaganda of invincibility.

Japan's market disillusionment. Japan's market, after its initial post-Pearl Harbor surge, saw real-term declines by late 1942. Despite official reports of victories, investors likely perceived the growing strain on resources, the effectiveness of the Allied blockade, and the unsustainable nature of the war effort. The Nomura family, for instance, reportedly began selling equities and buying real assets based on intelligence gathered from the elite tea houses, anticipating Japan's eventual defeat.

5. Wealth Annihilation in Occupied Europe: A Tragic Reality

In such an environment, British wealth, the accumulated riches of the centuries, would have been confiscated or destroyed. Not exactly a friendly environment for equities.

Financial ruin. For countries conquered and occupied by Germany or later by the Soviet Union, financial assets often faced total destruction. Stock exchanges in nations like Poland, Hungary, and Czechoslovakia were closed, and their equities became worthless, especially in countries that became Soviet satellites. Even in countries with reopened markets, like France, inflation and state control eroded real returns, making financial assets a disastrous store of value.

Systematic confiscation. The occupation regimes systematically plundered wealth.

• Jewish-owned property and businesses were summarily confiscated across Europe, often with the complicity of local collaborators.
• In Eastern Europe, the estates of the nobility and wealthy landowners were seized by German or Soviet forces, with original ownership often impossible to prove or restore after the war.
  This deliberate expropriation targeted specific groups and classes, leading to immense personal tragedies.

Economic exploitation. Beyond direct confiscation, the occupying powers exploited national economies, diverting resources, imposing forced labor, and fueling inflation. This created an environment where:

• Local businesses were forced to sell equity at deep discounts to German entities.
• Food and essential goods became scarce, leading to rampant black markets.
• Civil society broke down, with widespread looting and violence, making any form of wealth vulnerable.
  The experience of occupation was a brutal lesson in the fragility of wealth and property rights.

6. Real Assets as a Last Resort: Land, Gold, and Self-Sufficiency

The conventional wisdom has always been that owning property (houses, farmland, timberland) are the best safe havens in the apocalypse. Remember in Gone with the Wind, how Scarlet O’Hara’s dying, aged father, as the Union Army approached and the countryside was in flames, tells her at all costs to hold on to the property of Tara. “It’s the land, it’s the land, it’s the only thing that really matters.” The history of World War II (with the exception of agricultural land in Japan) generally supports this thesis.

Land's enduring value. While physical buildings were vulnerable to bombing, destruction, or expropriation, the underlying land often retained its value. In post-war Germany and Japan, even if structures were destroyed, title to the land was eventually restored, allowing for rebuilding and future prosperity. Owning agricultural land, particularly a self-sufficient farm, provided a crucial source of food in starving countries, offering both physical survival and a form of wealth preservation.

Gold as "mad money." Gold and jewelry proved to be the most portable and liquid forms of wealth during wartime chaos. They could be bartered for necessities like food and medicine on the black market, especially with occupying soldiers. However, this came with significant risks:

• The danger of being robbed or betrayed by informers.
• Forced sales at deep discounts to true value.
• Confiscation from bank safe deposit boxes by occupying authorities.
  Despite these challenges, a hidden stash of gold or jewelry offered a vital lifeline when other assets failed.

Brains and skills. Beyond tangible assets, human capital proved to be an invaluable, portable form of wealth. Individuals with specialized skills or entrepreneurial drive, even if they lost everything, could rebuild their lives and fortunes in new lands. The stories of refugees who fled with nothing but their intellect and determination, like the German Jews who rebuilt successful firms in New York, underscore the enduring power of human ingenuity in the face of catastrophe.

7. The Peril of Complacency for the Wealthy: A Costly Delay

The rich almost always become smug, assured, too confident—prosperous fools. Many of the German Jews, brilliant, cultured, and cosmopolitan as they were, were too complacent.

Underestimating danger. History repeatedly demonstrates that the wealthy, particularly prosperous minorities, often exhibit dangerous complacency in the face of impending societal collapse. German Jews, for instance, despite growing anti-Semitism and the Nuremberg Laws, initially believed their deep roots in German society, cultural contributions, and economic importance would protect them. They rationalized the Nazi threat as temporary or exaggerated, delaying crucial decisions to emigrate or move assets.

Tragic consequences of inaction. This complacency proved catastrophic. By the time the full extent of the Nazi regime's brutality became undeniable, it was often too late to act effectively.

• Selling businesses and properties meant accepting deep distress discounts.
• Exorbitant "flight taxes" and foreign exchange controls stripped away most of the remaining capital.
• Many who delayed found themselves trapped, leading to confiscation of assets and, ultimately, the Holocaust.
  The cost of being late was not just financial ruin but often the loss of life itself.

The illusion of control. The wealthy often harbor the illusion that their connections, influence, or ability to "read the room" will grant them sufficient time to extricate themselves and their fortunes when things turn bad. However, events in times of chaos move with unexpected speed and ruthlessness, overwhelming even the most astute. The lesson is clear: anticipation and early, decisive action, no matter how costly or inconvenient at the time, are paramount for true wealth preservation.

8. Diversification and Offshore Havens: Essential Catastrophe Insurance

No matter how safe and secure your home country appears, even if it’s the United States, every truly wealthy person should have some assets elsewhere.

Strategic diversification. To safeguard wealth against unforeseen "Black Swans" and societal breakdowns, comprehensive diversification is non-negotiable. This extends beyond traditional asset classes to include geographical diversification. Relying solely on in-country investments, even in seemingly stable nations, exposes one to catastrophic risks.

Offshore sanctuaries. Maintaining a portion of wealth in secure, legally robust offshore havens acts as essential catastrophe insurance. This involves:

• Diversifying currencies to protect purchasing power.
• Ensuring absolute legal clarity of ownership for overseas accounts, anticipating potential future challenges.
• Recognizing that while expensive, moving capital early is far better than being caught unprepared.
  The goal is to create an "escape hatch" for both capital and, if necessary, oneself.

Beyond financial assets. A holistic approach to wealth preservation also includes tangible assets outside financial systems.

• A self-sufficient farm or ranch in a remote, accessible location can provide food and shelter during periods of extreme disruption.
• Physical gold and jewelry, stored securely and discreetly, offer liquidity and portability when traditional financial systems fail.
  These measures acknowledge that future "barbarians" may come in unexpected forms, from financial implosions to ecological plagues, demanding preparedness beyond conventional investment strategies.

9. The Korean War: A Market's Foresight and a President's Test

The Japanese stock market had by far the most violent reaction. For one thing, it was still immature and tender. ... Nevertheless, with early prescience the Japanese market bottomed that day. The good guys did not get pushed into the sea, and although the Korean War was a long bloody stalemate, the U.S. and the West proved they would and could stand up to Communist aggression in a land war in Asia.

WWII's final act. The Korean War, ignited by North Korea's surprise invasion in June 1950, served as a critical post-WWII test of Western resolve against Communist expansion. It was fought with WWII-era men and weapons, and its outcome had profound implications for the future of Asia, particularly Japan. The initial North Korean offensive pushed U.S. and South Korean forces to the brink of annihilation, creating widespread panic.

Japan's market prescience. The Japanese stock market, still nascent after its post-war reopening, reacted with extreme volatility. It plummeted 50% in the first 11 days after the invasion, reflecting fears of a Communist takeover and Japan's vulnerability. However, with remarkable foresight, the Nikkei bottomed on July 6, 1950, even as U.S. and ROK forces were in desperate retreat. This market bottom preceded any good news from the front, anticipating the successful defense of the Pusan perimeter and the eventual Inchon landing.

Economic catalyst. Beyond military outcomes, the Japanese market also shrewdly anticipated the economic impact of the war. The Korean War provided a massive boost to Japan's struggling economy through special U.S. war procurements and rebuilding contracts. This influx of capital and demand fueled an incredible bull run for Japanese stocks throughout the 1950s, demonstrating the market's ability to foresee both geopolitical stability and economic opportunity.