The question we should all ask: how did we miss that?

I recently returned from a week-long trip to Germany which centered around an Army reunion in Fulda, Germany, along the former East-West German border. A lot has changed in the 32 years since I was stationed there. Sadly, after three decades of post-Cold War peace, Europe is, again, faced with the threat of kinetic conflict with Russia. And they are not prepared.

In the absence of a common enemy – the Warsaw Pact and, more specifically, the Soviet Union – Western European countries drew down their military forces. Germany dropped it long-standing military conscription program. NATO members fell out of compliance with NATO military spending requirements. Complacency ruled the day. Russia’s invasion of Ukraine changed everything.

The question we should all ask: how did we miss that?

Even as Russia amassed troops along the Ukrainian border, analysts downplayed the risk: a “minor incursion” if at all.

Pfft! What, me worry?!

A similar intelligence failure occurred in Israel. Reportedly, Israeli Defense Forces obtained Hamas’ full invasion plan months beforehand. And the IDF dismissed the threat.

Tactical errors, like those committed by US forces prior to the Japanese attack on Pearl Harbor, can be root causes. Psychological factors are often at play, too, and this is where I see parallels between recent geopolitical miscalculations and investor (mis)behavior.

The US stock market rally since the lows of October 2022 has been remarkably strong and resilient. Risks have been downplayed. Recession? Nah. Higher-for-longer interest rates? Pfft! What, me worry?! This kind of cavalier attitude can be costly.

Morgan Stanley’s chief US equity strategist recently gave up on his bearish outlook. He could have simply reassessed his position considering changing market conditions – good. On the other hand, he could have caved to pressure – bad. I do not know.

As an investor, it might be time to be like Poland

I do know that investors would be wise to balance their optimism (over-confidence) with healthy doses of opposing views, situational awareness, and…pessimism. Great investors harness inquisitiveness, discount market narratives, and constantly ask what could go wrong. When financial markets are “priced for perfection,” as I believe they now are, there is little room for error. What if the unexpected happens? Sometimes winning means not losing as much.

Back to Europe, besides Ukraine, who is taking the Russian threat seriously? Poland, Finland, and the Baltic states, for sure. These countries are geographically located on the front lines, and they have historically suffered Russian aggression. Poland now spends the highest percentage of GDP on defense of any NATO member, including the US; they have vowed to build the largest standing military in Europe.

As an investor, it might be time to be like Poland.

About the Author

Bill McCollum is an investment advisor representative with Eagle Financial, a Wealthcare company. Investment advice offered through Wealthcare Advisory Partners, LLC, (“WCAP”). WCAP is a Registered Investment Advisor with the U.S. Securities and Exchange Commission. Investing involves risk, including potential loss of principal involved. Past performance is not a reliable indicator of future results. Not all strategies are suitable for all investors.

Bill McCollum

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