Here's the most profitable way to trade a geopolitical shock

Archduke franz ferdinand shotWikipedia CommonsGavrilo Princip assassinated Archduke Franz Ferdinand of Austria and his wife — which led to events that led to WWI.

Geopolitical events often make traders and investors nervous, and this will lead to volatility in the financial markets.

However, history shows these events generally don’t have a sustained impact.

“We reviewed the data and it seems that the large majority of individual major events — ranging from the assassination of Archduke Ferdinand 100 years ago through to 9/11 and recent events in Iraq and Ukraine — impact major stock markets by around 10% of less, with the effect being fully reversed within a month or so,” writes Credit Suisse’s Head of Research and Deputy Global CIO Giles Keating.

“This suggests that the most profitable strategy has usually been the contrarian one of buying into price falls caused by such incidents,” Keating adds.

True, there have been a several times that markets didn’t recover as quickly after seismic geopolitical events such as the invasion of France in 1940 and the Yom Kippur War (which led to a complete realignment of control over global oil).

But even then stocks saw recoveries within 2-3 years, according to Credit Suisse.

Notably, Warren Buffett also champions the stay-calm-when-all-hell-goes-loose strategy. At the absolute height of the financial crisis, he wrote in a New York Times:

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

As an interesting side note, Napoleon — someone who literally changed the global geopolitical order — defined “military genius” as “a man who can do the average thing when all those around him are going crazy.”

As some have pointed out, the same can be said of investing.

Markets COTD April 23JPMorgan Asset ManagementHow Warren Buffett sees the stock market.

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