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After Afghanistan, Biden Can Learn From How Fund Managers Handle Their Disasters

Five basic strategies from investment analysis apply to war and diplomacy too.

By , the chief global strategist at Barings and the head of the Barings Investment Institute.
Chinese yuan banknotes are seen behind an illuminated stock graph on Feb. 10, 2020. Dado Ruvic Illustration/REUTERS
Chinese yuan banknotes are seen behind an illuminated stock graph on Feb. 10, 2020. Dado Ruvic Illustration/REUTERS

Leaving Afghanistan

You’re still new in your role, even if you’ve been in the business a while. You’ve been nervous about a position taken by a predecessor, but it looks very messy to fix. Then, one quiet weekend in August as you try to squeeze in a little break, it all comes badly unraveled for all to see. If you’re not a Wall Street fund manager who just took over an international portfolio hit by this month’s crash in Chinese technology stocks, then you may just be U.S. President Joe Biden watching the violent unraveling of Afghanistan.

Either way, it’s bad, and you need a plan.

Of course, the consequences of the Afghan government’s collapse are tragic for its citizens, painful for the families of soldiers who lost their lives, and costly to U.S. prestige. Thursday’s deadly terrorist attack at the Kabul airport will live in infamy. But as ghastly as the current headlines may be, it’s important to keep the Afghanistan withdrawal in the context of a U.S. foreign-policy agenda that consists of a wide and diversified range of initiatives to advance the country’s interests. Think of foreign policy as an investment fund containing a variety of positions, some riskier than others but all aimed at a common goal. A few key principles of portfolio management look especially relevant as Biden plots his strategy from here.

You’re still new in your role, even if you’ve been in the business a while. You’ve been nervous about a position taken by a predecessor, but it looks very messy to fix. Then, one quiet weekend in August as you try to squeeze in a little break, it all comes badly unraveled for all to see. If you’re not a Wall Street fund manager who just took over an international portfolio hit by this month’s crash in Chinese technology stocks, then you may just be U.S. President Joe Biden watching the violent unraveling of Afghanistan.

Either way, it’s bad, and you need a plan.

Of course, the consequences of the Afghan government’s collapse are tragic for its citizens, painful for the families of soldiers who lost their lives, and costly to U.S. prestige. Thursday’s deadly terrorist attack at the Kabul airport will live in infamy. But as ghastly as the current headlines may be, it’s important to keep the Afghanistan withdrawal in the context of a U.S. foreign-policy agenda that consists of a wide and diversified range of initiatives to advance the country’s interests. Think of foreign policy as an investment fund containing a variety of positions, some riskier than others but all aimed at a common goal. A few key principles of portfolio management look especially relevant as Biden plots his strategy from here.

Cut your losses quickly. Every portfolio manager inherits troublesome investments taken for various reasons that seemed good at the time. Only a few people in Washington second-guessed then-President George W. Bush’s decision to defeat al Qaeda and its Taliban hosts in the wake of the 9/11 attacks. Moreover, there have been real successes in Afghanistan, such as the elimination of Osama bin Laden, the rise in female literacy, and the fall of infant mortality rates. But even the best of intentions can’t make the math work, with more than 150,000 people dead, including 6,000 U.S. troops and contractors, and several trillion dollars spent. Each of Bush’s successors saw the calculus moving against him, but the strategic loss has crystallized on Biden’s watch. And while his decision to move quickly looks disastrous now, the chance to cut losses and reset Washington’s agenda may meet kinder judgment in time.

Update investors often. Giving unvarnished accounts of why a position went wrong is the best way to keep your investors’ confidence. It’s not wrong to remind everyone that it wasn’t your decision to buy those Chinese tech companies, but you have to pivot to your next plans to really restore confidence in your strategy. The same is true in politics and foreign policy. Biden’s pivot has been overwhelmed so far by scenes of violence and mayhem, but that makes candid explanations that accept responsibility for mistakes all the more important.

Reinforce key positions. A disastrous exit is also a good time for a review of core portfolio holdings. Maybe you want to add to those blue-chip stocks that pay a dependable dividend. Maybe more government bonds would provide some stability at a time when you can’t afford any more losses in choppy markets. For Biden, this means a little extra effort to reiterate his commitment to the United States’ allies, especially in Europe and Asia. A speech, a trip, and a joint military exercise all would help remind everyone that the country’s central commitments remain unaffected by the disastrous events in Kabul.

Review marginal investments. Is the investment case still sound for that newly listed Malaysian conglomerate? Will a currency crisis wipe out the juicy yields on those South African bonds? A good portfolio manager, like a good president, must review the biggest risks every day. But especially in the wake of a very painful setback, this is the time for the administration to refresh its contingency planning for a crisis in Taiwan, a new missile launch by North Korea, or a fresh Russian cyberattack on its Baltic neighbors. Those are the risky positions that will be especially important to manage now.

Watch for nearby opportunities. When your Chinese tech stocks collapse, the last thing you want to do is look at other Chinese tech stocks or, indeed, other Chinese stocks of any kind. But good investors know that opportunities hide in the wreckage of a sector that markets have indiscriminately punished. For the Biden administration, it would be all too easy to walk away from a region that looks so hopeless, but this is precisely the time to explore long-shot opportunities. Pakistan has always had good relations with the Taliban, but can it now do more to keep its neighbor from harboring terrorists? U.S. engagement with Iran will remain dominated by its nuclear agenda, but the Iranian government will be wary of Sunni extremism taking root next door.

Of course, war and diplomacy remain a far cry from investment analysis and portfolio construction. As the Kabul attack reminds us, foreign policy carries life-and-death consequences, which can hardly be said of money management. But the tremendous impact of their decisions is precisely why policymakers might want to cast their net wide and look at methods from other disciplines that navigate an uncertain and volatile world. Both presidents and investors make an endless stream of decisions based on incomplete—and often incorrect—information. They also manage strategies that play out amid changing circumstances and shifting opportunities. That is why it becomes so important to explain yourself clearly, admit mistakes quickly, reprioritize where needed, and diversify your efforts as broadly as possible.

If a bruised investor can look beyond China to find other stocks that offer growth and profit, a beleaguered president can surely find less costly strategies to contain the terrorist threat emanating from Afghanistan and reassert U.S. credibility in the world.

Christopher Smart is the chief global strategist at Barings and the head of the Barings Investment Institute. Twitter: @csmart

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