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I think this is the perfect time to talk about discipline. Headlines today are dominated by the conflict in Iran and the closure of the Strait of Hormuz. With Brent crude oil surpassing $120 per barrel recently, the market is becoming gripped by fear. The logic is simple and reactionary: Oil prices are up, inflation will spike, consumers will retreat, therefore sell everything. This is what famed investor Howard Marks calls ‘First Level Thinking,’ a simplistic approach that focuses only on the immediate obvious consensus. To move beyond this immediate reaction, we must engage in what Howard Marks called ‘Second Level Thinking,’ which requires us to ask, what is important and what comes next? What is the likely outcome and is it already priced in? During times of turmoil one set of investors profit from the displacement of value. Those with the discipline to evaluate high-quality businesses that would remain intact long after conflicts end, and have the fortitude to invest in them when others are running for the hills. History has shown that the most valuable asset an investor could own is discipline.

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The Ghost of 1990

 

“History doesn’t repeat itself, but it often rhymes.”
- Mark Twain (at least most people think it was him - highly disputed)

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We have seen this script before. In 1990, as Iraq invaded Kuwait, oil prices doubled almost overnight. The S&P 500 fell nearly 16% in a matter of weeks. The consensus back then is becoming eerily similar to today’s: that a permanent energy crisis would break the back of the global economy.
 

S&P Return - One Month In the Conflict
1990 Gulf War - Down 9.4%
2026 Iran War - Down 7.2%

 

Oil Price Movement (Approximately) - One Month In
1990 Gulf War - $20 to $40 (up 100%)
2026 Iran War - $70 to $107 (up 53%)
 

The parallels today are striking. While the “herd” focused on the price per barrel, disciplined investors focused on the intrinsic value of businesses. They realized that while a war might disrupt a quarter or two of earnings, it rarely destroys the long-term compounding power of a high-quality, competitively advantaged company. By the time the uncertainty of the Gulf War turned in 1991 and the end was near, the market rallied. Those who exited and were spooked in 1990 didn’t just lose money, they lost the opportunity to participate in one of the great recoveries of the decade. The lesson learned, you need the discipline to remain steadfastly invested, as long as the underlying business has durable competitive advantages that will allow them to earn high returns on their invested capital for the foreseeable future. History and the principles we follow are clear; panic is not a strategy, and selling into a geopolitical shock only serves to turn a temporary dip into a permanent loss of capital.

 

Core Anchors to Lean On

Howard Marks teaches us that the list of unknowns is infinite. The power of saying “I don’t know” is very powerful. We don’t win by guessing military strategies in the Strait of Hormuz disruption. Instead, we should focus our attention on things we can decipher. Always lean on the characteristics of the underlying business you are evaluating.

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Do they have superior products or services?

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Do they have pricing power?

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Do they earn a high return on invested capital?

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Do they have competitive advantages that will keep them on top?

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Do they have the cash to outlast a crisis?

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The timeline of war is unknowable, but we are certain that durable competitive advantages allow our portfolio of companies to survive the now and thrive in the future. 

 

Warren Buffett’s philosophy on market turbulence was summed up in his 1994 letter to Berkshire Hathaway shareholders, where he addressed the “fear of unknowns.” He stated that if they had let macro-economic or geopolitics dictate investment timing, they would have missed out on nearly all their best opportunities. In markets, there will always be something to worry about. In his letter he listed the Vietnam War, wage and price controls, two oil shocks, resignation of a president - and noted that none of those crises factored into the purchase or sale of great businesses.

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“We will continue to ignore political and economic forecasts, which are an expensive distraction to many investors.” 
- Warren Buffett in 1994 Letter to Shareholders

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While it might be difficult to look at your account in times of high uncertainty, know that this is and always will be temporary. There is no perfect time to invest where the horizon is clear of conflicts, inflation, or political dissonance. Like Buffett said in his letter, if you wait for the world to stop being scary, you will be waiting forever.

Stay disciplined.

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Written by: JC Rodriguez

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Opinions expressed here are not to be

taken as investment advice. Consult with

your own investment advisor. 

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