by Marc Lichtenfeld, Chief Income Strategist, The Oxford Club
Wednesday, November 28, 2012: Issue #1914
Nathan Rothschild is credited with creating the stock market axiom “Buy on the sound of cannons, sell on the sound of trumpets.” The phrase means that the beginning of a war is a good time to buy stocks – as there is usually a fair amount of panic leading up to war.
Through the years, investors have had every reason to avoid Israel. Surrounded by neighbors sworn to its destruction, along with a soon to be nuclear armed Iran that constantly rattles its sabers at the tiny nation of just 7.8 million people (a little less than the population of the State of Virginia).
However, investors who feared putting their money to work in a country that is under constant threat have missed out on some big opportunities. Israel is home to some of the most successful and innovative companies on the planet.
For example, Teva Pharmaceuticals (Nasdaq: TEVA) is the dominant player in generic drugs.
CheckPoint Software (Nasdaq: CHKP) is one of the leading IT security companies in the world. And the tiny country’s entrepreneurial spirit has fostered many successful small cap companies like Given Imaging (Nasdaq: GIVN), the maker of the pill camera and Elbit Systems (Nasdq: ESLT), makes drones, remote weapons systems and other defense related products.
Other than the United States, Israel has more companies listed on the Nasdaq than any other country.
History Doesn’t Repeat, But it Rhymes
But here is why you should consider investing in Israeli stocks now. While it might seem counterintuitive to invest in a country that just got finished with a nasty skirmish with its enemies – particularly one where nothing was accomplished (other than Hamas agreeing to stop firing rockets at Israeli civilians), history shows that now is the best time to invest in Israeli companies.
Over the past 12 years, if investors had the courage to invest their money at the start of hostilities (at the sounds of cannons) between Israel and the Palestinians, they fared very well, much better than if they’d invested in the S&P 500.
For example, on September 28, 2000, Israeli Prime Minister Ariel Sharon made an appearance on the Temple Mount in Jerusalem, just steps from the Al-Aqsa Mosque. This enraged Palestinian Muslims who rioted for days, leading to clashes between Israeli police and Palestinians and eventually devolving into violence between more heavily armed factions.
Late 2000, was the early stages of the dot com collapse and Israeli stocks were not immune. However, if you had invested in the TA-100 index, the 100 largest stocks on the Tel Aviv Stock Exchange, the day after Sharon’s infamous stroll, five years later, you’d be up 36%, while investors in the S&P 500 were still down 7%.
In December 2008, things got really bad between the two sides. After repeated rocket fire by Hamas into Israel, the Israeli army retaliated, eventually sending troops into Gaza.
From a financial standpoint, the world was still smack dab in the middle of the economic crisis. The collapses of Lehman Brothers and Washington Mutual were just three months old. The bear market was raging. It was a very scary time to invest anywhere, especially in a country in armed conflict whose markets are dominated by technology companies.
Yet, if you invested in the TA-100 at the sound of cannons in 2008, you would have seen a three year return of 85%, versus the S&P 500’s 55%. If you still held those stocks today, you’d have doubled your money in the TA-100, a 101% return, while the S&P posted 76% gains.
And since November 14th of this year, when Israel assassinated Hamas’ military leader, kicking off another wave of fighting, the TA-100 is up over 3%.
Interestingly, during the two bear markets of the past 12 years, the Israeli market bottomed first. In 2003, it bottomed about a month before U.S. markets. Surprisingly, the TA-100 bottomed in November 2008, before intense fighting began in December. U.S. stocks didn’t stop falling until March 2009.
Investing in any market when there is panic is usually a good idea. And there often is panic before war breaks out. History shows that investing in Israeli stocks during the times when it’s scariest is a great way to make significant profits over the next few years.
Editor’s Note: In the Spring of 2013, Marc will be taking a group of investors to Israel to meet with public and private companies, venture capital firms and other unique investment opportunities. For more information, contact Barb Perriello and mention Investment U.Investing in Israel: Time To Buy This Emerging Market ,