Difficulty of Forecasting Future Cash Flow

Present-Value Analysis and the Difficulty of Forecasting Future Cash Flow 

When future cash flows are reasonably predictable and an appropriate discount rate can be chosen, NPV analysis is one of the most accurate and precise methods of valuation. 

Unfortunately future cash flows are usually uncertain, often highly so.  Moreover, the choice of a discount rate can be somewhat arbitrary. 

These factors together typically make present-value analysis an imprecise and difficult task. 

 

A perfect business that is simple to value: an annuity

A perfect business in terms of the simplicity of valuation would be an annuity; an annuity generates an annual stream of cash that either remains constant or grows at a steady rate every year. 

For real businesses, estimating its future cash flow is usually a guessing game

Real businesses, even the best ones, are unfortunately not annuities. 

Few businesses occupy impenetrable market niches and generate consistently high returns, and most are subject to intense competition. 

Small changes in either revenues or expenses cause far greater percentage changes in profits. The number of things that can go wrong greatly exceeds the number that can go right.

Although some businesses are more stable than others and therefore more predictable, estimating future cash flow for a business is usually a guessing game. 

A recurring theme is that the future is not predictable, except within fairly wide boundaries. 

Business uncertainty - the roles of management and investors

Responding to business uncertainty is the job of corporate management. 

However, controlling or preventing uncertainty is generally beyond management’s ability and should not be expected by investors.  

The limitations imposed by future uncertainty

“Attentiveness to limitations in the evidentiary basis” (or to the limitations imposed by future uncertainty) is a very important further concept. 


Dealing with future uncertainty

Here’s how Howard Mark discussed it in his book Mastering the Market Cycle:

Most people think the way to deal with the future is by formulating an opinion as to going to happen, perhaps via a probability distribution.

I think there are actually two requirements, not one.

• In addition to an opinion regarding what’s going to happen, 
• people should have a view on the likelihood that their opinion will prove correct. 

Some events can be predicted

• with substantial confidence (e.g., will a given investment grade bond pay the interest it promises?), 
• some are uncertain (will Amazon still be the leader in online retailing in ten years?) and 
• some are entirely unpredictable (will the stock market go up or down next month?) 

It’s my point here that not all predictions should be treated as equally likely to be correct, and thus they shouldn’t be relied on equally. I don’t think most people are as aware of this as they should be.



Realistic view of the probability that we are right before we choose

In short, we have to have a realistic view of the probability that we’re right before 

• we choose a course of action and 
• decide how heavily to bet on it. 

And anyone who’s sure about what’s going to happen in the world, the economy or the markets is probably deceiving himself.




It all comes down to dealing with uncertainty. 

To me, that starts with acknowledging uncertainty and having an appropriate degree of respect for it.


As I quoted Annie Duke this past January, in my memo You Bet!:

What good poker players and good decision-makers have in common is their comfort with the world being an uncertain and unpredictable place. They understand that they can almost never know exactly how something will turn out. They embrace that uncertainty and, instead of focusing on being sure, they try to figure out how unsure they are, making their best guess at the chances that different outcomes will occur.  (Thinking in Bets)




“I’m not sure.”

To put it simply, intellectual humility means saying
“I’m not sure,” 
“The other person could be right,” or even
“I might be wrong.” 

I think it’s an essential trait for investors; I know it is in the people I like to associate with.

Reference:

In investing, uncertainty is a given – how we deal with it will be critical. Read Howard Marks’s latest memo, in which he discusses the value of understanding the limitations of our foresight and “investing scared.”

https://www.oaktreecapital.com/docs/default-source/memos/uncertainty.pdf

When do you allow for the possibility that you’re wrong? When does reason-based confidence turn into hubris and obstinateness?

Holding and adding to declining positions is only a good idea if the underlying thesis turns out to be right and things eventually go as expected.

• In other words, when do you allow for the possibility that you’re wrong?  
• When does reason-based confidence turn into hubris and obstinateness? 

Investor faces uncertainty in investing.  An investor having a sense of uncertainty is not a bad thing.


Howard Mark shared his experiences:

• “Investing scared” – a less glamorous term than “applying appropriate risk aversion” – will push you to
-   do thorough due diligence,
-   employ conservative assumptions,
-   insist on an ample margin of safety in case things go wrong, and
-   invest only when the potential return is at least commensurate with the risk.
In fact, I think worry sharpens your focus. Investing scared will result in making fewer mistakes (although perhaps at the price of failing to take maximum advantage of bull markets).


• When I started investing in high yield bonds in 1978, and when Bruce Karsh and I first targeted distressed debt in 1988, it seemed clear that the route to long-term success in such uncertain areas lay in limiting losses rather than targeting maximum gains. That approach has permitted us to still be here, while many one-time competitors no longer are.


• I can tell you that in the Global Financial Crisis, following the bankruptcy of Lehman Brothers, we felt enormous uncertainty. If you didn’t, there was something wrong with you, since there was a meaningful possibility the financial system would collapse. When we started buying, Bruce came to me often saying, “I think we’re going too slow,” and then the next day, “I think we’re going too fast.” But that didn’t keep him from investing an average of $450 million per week over the last 15 weeks of 2008. I think Bruce’s ability to grapple with his doubts helped him arrive at the right pace of investment.



The topic of dealing with what you don’t know brings me to a phrase I came across a few years ago and think is very important: intellectual humility.

Reference:

In investing, uncertainty is a given – how we deal with it will be critical. Read Howard Marks’s latest memo, in which he discusses the value of understanding the limitations of our foresight and “investing scared.”

https://www.oaktreecapital.com/docs/default-source/memos/uncertainty.pdf

It is very important to acknowledge what we don’t know.

In Praise of Doubt

It is very important to acknowledge what we don’t know.

First of all, if we’re going to out-invest the rest, we need a game plan. There are a lot of possible routes to success on which to base your process: in-depth research into companies, industries and securities; arbitrage; algorithmic investing; factor investing; even indexation. But if I’m right about the difficulty of macro forecasting, for most people that shouldn’t be it.

Second, and probably more importantly, excessive trust in forecasting can be dangerous to your financial health. It’s never been put better than in the quote that’s often attributed to Mark Twain, but also to several others:

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.

Just a few words, but a great deal of wisdom.


No statement that starts with “I don’t know but . . .” or “I could be wrong but . . .” ever got anyone into big trouble. If we admit to uncertainty, we’ll investigate before we invest, double-check our conclusions and proceed with caution. We may suboptimize when times are good, but we’re unlikely to flame out or melt down. On the other hand, people who are sure may dispense with those things, and if they’re sure and wrong, as the quote suggests, the outcome can be catastrophic.

Reference:

In investing, uncertainty is a given – how we deal with it will be critical. Read Howard Marks’s latest memo, in which he discusses the value of understanding the limitations of our foresight and “investing scared.”

https://www.oaktreecapital.com/docs/default-source/memos/uncertainty.pdf

The challenge lies in trying to be above average in assessing the future. Why is that so hard?

First of all, forecasting is a competitive arena. The argument for the difficulty of out-forecasting
others is similar to the argument for market efficiency (and thus the limitations of active
management).

• Thousands of others are trying, too, and they’re not “empty suits.” Many of them are educated, intelligent, numerate, hard-working, highly motivated and able to access vast amounts of data and computing power. 
• So by definition it shouldn’t be easy to be better than the average.

In addition, since economics is imprecise, unscientific and inconsistent in its functioning,  there can’t be a method or process for forecasting that works consistently. 

• To illustrate randomness, I say that if, when I graduated from business school, I was offered a huge budget, an army of PhDs and lavish financial incentives to predict the coin toss before each Sunday’s football games, I would have been a flop. 
• No one can succeed in predicting things that are heavily influenced by randomness and otherwise inconsistent.

So forecasting is difficult for a large number of reasons, including

• our limited understanding of the processes that will produce the future, 
• their imprecise nature, 
• the lack of historical precedent, 
• the unpredictability of people’s behavior and 
• the role of randomness, and 

these difficulties are exacerbated by today’s unusual circumstances.

Reference:

In investing, uncertainty is a given – how we deal with it will be critical. Read Howard Marks’s latest memo, in which he discusses the value of understanding the limitations of our foresight and “investing scared.”

https://www.oaktreecapital.com/docs/default-source/memos/uncertainty.pdf

Value Investing Opportunities in Uncertain Times

Where to find value? When to buy? When to hold? When to sell?

Quantifying Uncertainty and Risk

A Buffett Disciple Shares His Secrets (Morningstar)

Low risk, high uncertainty situations.

Wall Street punishes uncertainties. The rewards can be very high for such low risk situations.

US recession: Avoid investing huge amounts as stock market seen nowhere near its bottom, advise experts

MUMBAI: Don't jump into the market with a suitcase full of cash as yet, experts warn retail investors, as many seem attracted at the prospect of entering the market after Monday's plunge.

"Suddenly, many investors have become extra brave and want to get into the market because they think every huge fall is a great buying opportunity. But they could be wrong because we are definitely not at the bottom of the market and there would be a lot of volatility in the near term, which the retail investors would find hard to stomach," say Devendra Nevgi, founder & principal Partner, Delta Global Partners.

"They should wait for at least six to eight weeks for a clear picture on the global scenario," he adds. But the advice is meant only for those who want to invest large sums at this point of time in stocks. Existing equity investors should continue with their regular investments like systematic investment plans ( SIPs) in mutual funds, as the long-term prospects of the Indian economy and the stock market is intact, albeit somewhat foggy, say experts.

"Long-term investors can continue to invest in stocks with a three to five-year time frame in mind," says Suresh Sadagopan, chief planner, Ladder7 Financial advisories. "Investors should use this opportunity to build and consolidate their equity portfolio. The current global problems could actually help the Indian markets as lower commodity prices, especially oil prices, could moderate inflation."

"We may also be near the peak interest rates as the Reserve Bank of India may hold rates against the current global backdrop," says A Balasubramanian, CEO, Birla Sun Life Mutual Fund. "With every fall, the valuations of stock are also getting attractive, making a strong case for allocation into equity."

Not surprisingly, investment advisors also want small investors to seriously consider diversifying their portfolio into precious metals, especially gold. Gold is already attracting a lot of investor attention, especially from HNIs, because many consider gold as the best hedge against upheavals in the global economy.

"We have been advocating gold for almost four years now. Investors should seriously consider parking 5-10% of their portfolio in gold, mainly as a hedge against uncertainties," says Nevgi. However, advisors warn investors against going overboard on gold as it could cause problems in the long term.

"I recently came across portfolios of individuals where the exposure to gold is as high as 30-40%. Sure, the prospects of gold look extremely promising, but still there is no reason for you to put all your eggs in one basket," says a wealth manager who declined to be named.

Monthly income plan is another option investors should consider at this point. "MIPs are meant for conservative investors as they invest mostly in debt and take a little exposure to equity. The debt part can unlock value in the near term when the interest rates start falling. Also, the equity valuations are attractive for long-term investment," says Balasubramanian.

"MIPs could prove a win-win situation as prospects for both debt and equity look bright at this point," says Nevgi.

http://economictimes.indiatimes.com/markets/analysis/us-recession-avoid-investing-huge-amounts-as-stock-market-seen-nowhere-near-its-bottom-advise-experts/articleshow/9534750.cms

The Risk is Not in The Car; It is the Driver Behind The Wheel.

It would be a risky situation if a person decides to drive a car without having undergone any form of training.  It is the person's lack of knowledge and skill that makes the situation risky and not the car.

Similarly, if someone wants to invest (or trade) in a particular instrument but has not undergone any form of training, this person would be assuming a higher risk, and it has nothing to do with the instrument.  It is often the lack of knowledge and skill that makes investing (and trading) risky and not the instrument itself.


What is risk in the context of investing?

Risk is a quantifiable entity.
People associate risk with uncertainty in outcome or expected return.  A fixed deposit gives an expected return that is certain but not stocks.
People associate risk with volatility.  Yes, this too can be risky for those who do not understand volatility and who fall folly to it, rather than taking advantage of it.


Risk in investing is thus generally defined as:  


"The quantifiable likelihood (probability) of loss or less-than-expected returns."  
The keyword here is uncertainty in outcome or expected returns.

How to be a good investor?

To be a good investor (and trader), one must first seek knowledge about the instrument that one is going to invest in (or to trade).  It is similar to taking on a new job.

• First, you must learn what your new role is all about, what kind of tools are there to help you in your everyday routines, what are the skill sets needed to perform your new job properly, etc.  
• After that, once you have acquired the knowledge and learnt the skills required, you still need a period of constant practice to apply your newly acquired knowledge and hone your new skills.  
• It is only after having practised for a sustained period of time before one is able to get the "feel" of the job and perhaps do it with ease and confidence.

Risk comes from NOT knowing what you are doing.
Enter at your own risk.

Risk and Uncertainty

Risk

What is risk?

In financial terms, risk is the probability of an investment's actual return being lower than expected.

Can we understand risk and take actions to lower it?

We now have the two elements necessary to start us on a path of business risk management.

How can we:

(1)  lower the potential downside of risk

and/or

(2)  lower the probability of occurrences?

Risk can be both

• intrinsic (within ourselves) and 
• extrinsic (from outside).  

If risk is the potential for a business loss, when may a business project be deemed a high risk?

A business project may be deemed a high risk because either:

(1)  there is a high likelihood of a loss of any size, 

or

(2)  there is even a very small likelihood of a large loss.  

Almost every business action carries some degree of risk.  High-risk actions require careful management because of their potential large negative consequences to the business.

Threat:  A threat is a potential event with a very low probability but a high negative impact.  

"Bet-your-company risk":  Avoid taking a "bet-your-company risk."  The potential negative consequences of such a risk are just too, too large.  For example, a bet-your-company risk would be spending all your available resources on developing a risky new product.  The company could fail if development were to be delayed or if sales were much lower than projected. 

However, entrepreneurial companies usually must face bet-your-company risks as they start up and grow.  Understanding and managing risk and uncertainty is especially important in these fledging enterprises.  Startups must be focused, innovative, responsive and also very lucky to survive.  Most often, they are not.

Uncertainty

"Uncertainty" is different from risk.  

Uncertainty is not knowing what the future will bring.  However, under the cloak of uncertainty, high risk can lurk.  Thus, lowering uncertainty can lower risks too.

Uncertainty can be more dangerous than risk.  Because we often know the elements of risks, we can plan for risk and take measures to mitigate the negative consequences of risk.  However, with uncertainty we are often flying blind.  It is hard to lower uncertainty if you do not know what it is and thus what to do to lower it.  

Quotes:  

"The consequences of our actions are so complicated, so diverse, that predicting the future is a very difficult business indeed."

"The best way to predict the future is to invent it."

"It's tough making predictions, especially about the future."

Related:
Risk and uncertainty in investing.  Investing is serious business.

Investing Money in Plain English (Video)

Managing risk in a turbulent economy an ever-increasing challenge for farmers

Managing risk in a turbulent economy an ever-increasing challenge for farmers
Nov 2, 2009 12:16 PM, By Paul L. Hollis, Farm Press Editorial Staff

Anyone reading this well knows that even when the U.S. general economy is humming along at a brisk pace, farming — and managing the inherent risk — is a tremendous challenge. When the economy is tanking, and the commodity markets are made even more complex by the involvement of various hedge and index funds, the risk becomes greater.

Mississippi State University Extension Economist John Anderson had some interesting things to say about managing risk in a turbulent economy during an Extension marketing meeting this past summer.

The volatility of commodity markets, especially in the past couple of years, have created many risks for producers, says Anderson, adding that his primary concern as an economist is that some farmers really haven’t recognized the nature of commodity markets.

An example of this volatility can be seen in the dramatic swings in wheat and corn prices, just in the last two years, he says. “Whatever commodity we’re talking about, we’ve been dealing with a lot of price volatility. Corn went from $8 down to about $4.50 per bushel, but many producers see this and say that corn is still at historically high levels. We need to understand the nature of commodity markets because they have unique characteristics that make the situation dangerous for producers.”

Pointing out some of these unique characteristics is what makes an economist a sort of “wet blanket,” says Anderson, and helps economics earn the nickname, “the dismal science.” But it is necessary that producers become familiar with these characteristics.

The first characteristic of a commodity market, he says, is that there are a large number of producers, and these producers are producing and marketing an undifferentiated product. In other words, if you’re growing corn, your corn is pretty much the same as another grower’s corn. Also, in a commodity market, there is no ability to set prices — producers are strictly price takers.

“And what really makes me a wet blanket is when I tell you that in the long-run, economic profits in a commodity market are zero,” says Anderson. “This is because costs of production quickly adjust when profits are high. Costs go up quickly. Corn was at a good price, but costs adjusted to $8 per bushel.”

Back in 2005, he says, if a producer could look ahead and predict $4.50 corn, he would have thought he wouldn’t be able to spend all of the money he’d make. But now, this same producer is thinking there’s no way he can make money with $4.50 corn.

“All costs have gone up, and that’s why this price volatility is so difficult to deal with,” says Anderson. “While $7 or $8 corn is great, you have to be prepared for when it goes back down. You can get burned on the cost side.”

The implications for producers of these volatile markets are many, he says, including that there is far less margin for error than in the past. “There’s more money on the table in each production cycle, and the consequences of being on the wrong side of the markets is much more severe. There are major input risks as well as output price risks, and there are fewer tools for managing the input risks than there are for managing the output side.”

This is why it’s important that farmers aggressively manage costs at all times, says Anderson. Producers today are good, efficient managers, but they can’t become complacent, he adds. Also, the short gains from high-price periods need to be used to build equity.

“One of my pet peeves is when we talk about ‘new price plateaus,’ because that encourages growers to go out and buy a lot of new equipment,” he says.

There also are implications for policy makers in these volatile markets, says Anderson. “One of these is that policy efforts aimed at raising prices through increasing demand — such as bioenergy policy — will not improve farm profits in the long run. From the supply side, this phenomenon is usually recognized as the technology treadmill. But from the demand side, the effect is usually downplayed or ignored.”

It also needs to be recognized, he says, that there really is no such thing as a new price plateau in the commodity markets. “A persistent increase in price reflects a persistent increase in the cost of production. If there’s a new price plateau, then there’s a new cost plateau underneath it. We get into a lot of trouble thinking prices will be high for the next five years.”

e-mail: phollis@farmpress.com

http://southeastfarmpress.com/news_archive/risk-management-1102/

How to handle market uncertainty

Wednesday November 4, 2009
How to handle market uncertainty
Personal Investing - By Ooi Kok Hwa



AFTER the strong rally over the past seven months, the market is finally undertaking some corrections. Some investors may not fully comprehend why the stock market moved up when the companies reported bad financial results, but tumbled when the companies started to show better financial performance.  (Comment:  There were many periods in the past when market movements were down when the economy was doing well, and vice versa.)

We need to understand that the market had discounted the good news. Some of those good financial results were already reflected in the stock prices. The stock market cycle always moves ahead of the economic cycle.

During the Great Depression in 1929, the stock market recovered eight months ahead of the real economic recovery. Even though some investment experts say the worst is far from over, we notice that a lot of economic indicators are pointing to an economic recovery.

However, the economic growth may not move as fast as the stock market. As a result, while the economy continues to recover, stock prices need to come down to reflect the fundamentals of the companies.  (Comment:  Overcome this short term uncertainties by taking a long term horizon in your investments.)

This explains why once investors started to realise that the stock prices could not be supported by the fundamentals of some companies, especially blue-chip stocks, the stock prices had to come down to reflect the true value of companies.

Nevertheless, based on our analysis, most listed companies in Malaysia showed great recovery in their second quarter of 2009 financial results against the results in the first quarter as well as the fourth quarter of 2008.

We need to understand that there are many disturbing factors that affect the stock prices, but not reflect the fundamentals of companies. From the perspective of behavioural finance, investors’ expectations and emotions have great influence on stock prices. Two factors influence investors’ expectations – past experience and new information.

In the absence of new information, investors will use past trends to extrapolate into the future. As a result, the stock prices may persist in trend for a while before the next market reversal. This may cause the market to overreact to good financial results as shown by some companies.

According to Fischer Black, some investors tend to be affected by noise that makes it difficult for them to act rationally. (Comment:  This is to the benefit of those who are able to value the stocks and not act in folly with the market.)  He defines noise as what makes our observations imperfect as well as keeps us from knowing the expected return on a stock.

Some investors, due to lack of self control and proper financial training, may misinterpret economic information and sometimes be carried away by the stock market emotion. Investors may feel uneasy over the recent strong market performance. However, they will still choose to follow the market trend even though they feel their judgment may be wrong. In behavioural finance, we label this as conformity in which we are inclined to follow the example of others even though we do not believe in the action.

The above phenomenon of stock prices being valued beyond the fundamentals of the companies is applicable to some selected blue-chip stocks. Nevertheless, Bursa Malaysia does have plenty of second- and third-liner stocks which are still selling at cheap valuations. Investors may want to take the current market corrections to accumulate them for the long-term.

We need to relate the current stock prices to the intrinsic value of the companies. Some investment tools like price-to-earnings ratio, dividend yield and price-to-book ratio will assist us in filtering out some good companies for investment.

Even though there are a lot of uncertainties along the way to full financial recovery, we feel that investors may view the recent corrections as good opportunities to build their long-term investment portfolios. For those who have been looking for investment returns higher than fixed deposit rates, there are still a lot of stocks that are paying handsome dividend yield of more than 4% and yet selling at cheap prices.

One of the most important investing principles is to have the discipline to hold long term. We should not pay too much attention to the fluctuation of stock prices; instead, we need to focus on the earning power of the companies as it is one of the most important drivers in deriving the intrinsic value of a company.

As a result of the financial crisis, even though a lot of companies are showing great recovery, their performance and prices are still lower than their peak level during the year in 2007. If the overall economy and the companies’ performance recover to 2007 level, their current stock prices may be a good entry level.

● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
http://biz.thestar.com.my/news/story.asp?file=/2009/11/4/business/5035143&sec=business

Investing During Uncertainty

Investing During Uncertainty
by Investopedia Staff, (Investopedia.com) (Contact Author Biography)


Every day it seems like the world is getting smaller. If you watch any financial television station or read the newspaper, you are most likely aware of how events in one country seem to have an ever-increasing affect on other countries around the world. We are more interconnected now than at any other time in history. It goes without mention that globalization definitely has its positives, but when threats of financial crisis, war, global recession, trade imbalances, etc, do occur it often leads to talk of moving money to safer investments and increasing government deficits. This rising uncertainty can confuse even the well-informed investor.


Uncertainty
Any time you put money at risk for the chance of profit there is an inherent level of uncertainty. When new threats such as war or recession arise, the level of uncertainty increases significantly as companies can no longer accurately predict their future earnings. As a result, institutional investors will reduce their holdings in stocks considered unsafe and move the funds to other sources like precious metals, government bonds and money-market instruments. This sell-off, which occurs as large portfolios reposition themselves, can cause the stock market to depreciate.

Effects of Uncertainty
Uncertainty is the inability to forecast future events; people can't predict the extent of a possible recession, when it's going to start/end, how much it will cost, or what companies will be able to make it through unscathed. Most companies normally predict sales and production trends for the investing public to follow assuming normal market conditions, but increasing levels of uncertainty can make these numbers significantly inaccurate. (For more, see Recession: What Does It Mean To Investors.)

Uncertainty itself can affect the economy on both the micro and macro level; a description of uncertainty on a micro level focuses on the effect on individual companies within an economy faced with the threat of war or recession, whereas the view of uncertainty on a macro level looks at the economy as a whole (To learn more, see Economics Basics.):

From a company-specific point of view, uncertainty provides a major concern for those that produce consumer goods every day. For example, consumption may fall on the threat of a recession as individuals refrain from purchasing new cars, computers and other non-essentials. This uncertainty may force the companies in certain sectors to layoff some of its employees so that it can combat the impacts of lower sales. The level of uncertainty that surrounds a company's sales also extends into the stock market. Consequently, stock prices of companies that produce non-essential goods sometimes experience a selloff when levels of uncertainty rise. (For more, see The Impact Of Recession On Businesses.)

On a macro level, uncertainty is magnified if the countries at war are major suppliers or consumers of goods. A good example is a country that supplies a large portion of the world's oil. Should this country go to war, uncertainty regarding the level of the world's oil reserves would grow. Because the demand for oil would be high and the supply uncertain, a country unable to produce enough oil within its own borders would be required to ensure that enough oil was stored to cover operations. As a result, the price of oil would increase.

Another macro-level event that affects companies and investors is the flight of capital and devaluation of exchange rates. When a country faces the threat of war or recession, its economy is considered uncertain. Investors attempt to move their currency away from unstable sources to stable ones; the currency of a country under a threat of war is sold and the currencies from countries without the threat are bought. The average investor probably would not do this; however, the large institutional investors and currency futures traders would. These actions translate into a devaluation of exchange rates.

What's an Investor to Do?
When situations of heightened uncertainty arise, the best defense is to be as well informed as possible. Keep updated by reading the newspaper and researching individual companies. Analyze which sectors have more to gain and lose with a war and decide on a long-term plan. Times of heightened uncertainty can lead to great opportunities for investors who position themselves to take advantage of it. Some investors might decide to be offensive and search for companies that provide goods or services that will lead to great returns when things turn around. It is difficult to commit capital during uncertain times, but it can often reap huge rewards in the longer run. Those who want to mitigate uncertainty and risk might be content leaving their money where it is or perhaps moving it to safer securities. Regardless of which strategy you decide to take (if any), you can't go wrong over the long term by keeping yourself well informed and getting into a position so that you can take advantage of prices when the things reverse.

For further reading, see Intro To Fundamental Analysis.
by Investopedia Staff, (Contact Author Biography)Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.

http://www.investopedia.com/articles/basics/03/021403.asp?partner=basics2