Vietnam War

The Vietnam War (1955-1975) was a prolonged military conflict in Southeast Asia that, for investors, stands as a monumental case study in the destructive interplay between war, government policy, and the economy. While fought thousands of miles away, its financial consequences were felt directly on Wall Street and Main Street. The U.S. government financed the costly war primarily through Deficit spending rather than raising taxes, all while expanding expensive domestic programs under President Lyndon B. Johnson's Great Society initiative. This “guns and butter” policy unleashed a torrent of new money into the economy, igniting a powerful and persistent Inflation that the Federal Reserve struggled to contain. The war's economic fallout ultimately led to the collapse of the Bretton Woods system, a long and punishing Bear market, and the painful era of Stagflation, offering timeless lessons on the importance of fiscal discipline and the real-world impact of Geopolitical risk on a portfolio.

At the height of the Vietnam War in the late 1960s, the United States was attempting an impossible economic balancing act. The government was spending billions on the military effort (“guns”) while simultaneously funding the most ambitious set of domestic social programs in a generation (“butter”). This was a classic recipe for economic trouble. Instead of funding this immense expenditure through unpopular tax hikes, the government relied on borrowing. This massive increase in government spending, without a corresponding increase in economic output, meant too much money was chasing too few goods. The result was predictable: the value of the U.S. dollar began to erode, and inflation, which had been dormant for years, came roaring back to life. Consumer prices, which had been rising at a gentle 1-2% per year in the early 1960s, were climbing by over 6% by the end of the decade and would continue to accelerate into the 1970s.

For the stock market, the combination of a divisive war, social unrest, and relentless inflation was toxic. The optimism of the post-WWII boom evaporated, giving way to a long period of stagnation that has since been dubbed “the lost decade” for investors.

The Dow Jones Industrial Average, a key barometer of the U.S. stock market, hit a peak of just under 1,000 in early 1966. It would not decisively break above that level again until 1982. For sixteen years, investors who simply held the index went nowhere in nominal terms. However, the reality was far worse. When accounting for the high inflation of the era, the real value of the stock market was crushed. An investor's purchasing power declined dramatically even if their brokerage statement showed a flat-lining portfolio. This period serves as a harsh reminder that nominal gains mean nothing if they are outpaced by inflation.

The economic pressures of the war had global consequences. Under the Bretton Woods agreement, the U.S. dollar was pegged to gold at $35 per ounce, and other major currencies were pegged to the dollar. As the U.S. printed more money to fund the war, foreign countries, particularly France, grew nervous and began exchanging their dollar reserves for U.S. gold. The U.S. gold supply dwindled, making the peg unsustainable. The situation came to a head on August 15, 1971, when President Richard Nixon unilaterally cancelled the direct international convertibility of the U.S. dollar to gold. This “Nixon Shock” effectively destroyed the Bretton Woods system and ended the era of the Gold standard, ushering in the modern system of floating exchange rates.

The Vietnam War era, while painful, offers crucial and enduring lessons that are central to the value investing philosophy.

• Geopolitical Risk Is Financial Risk. Wars and major political events are not abstract headlines; they have direct and powerful economic consequences. A prudent investor must assess how government actions, especially those concerning war and spending, will impact inflation, currency values, and corporate profits.
• Inflation Is the Silent Portfolio Killer. The 1970s demonstrated that high inflation can decimate wealth even when stock markets appear to be moving sideways. This underscores the value investor's focus on buying businesses with durable competitive advantages and the ability to raise prices (pricing power) to protect their margins during inflationary periods.
• Patience and Price Create Opportunity. The despair of the 1970s stock market created the opportunity of a lifetime. By the end of the decade, high-quality companies were trading at absurdly low valuations. It was during this period of maximum pessimism that Warren Buffett famously told Forbes magazine in 1974 that it was the time “to be greedy when others are fearful.” Those who bought into the fear and gloom of the 1970s were positioned for the spectacular bull market of the 1980s and 1990s.