Few Americans realize how close the Allies came to losing World War I just 100 years ago in the spring of 1918. The United States had declared war on Imperial Germany in April 1917 but few American troops had reached the Western Front by the spring of 1918. The German High Command led by General Erich Ludendorff gambled that an early spring offensive could overwhelm the French and British forces before the Yanks arrived in force.
The Germans moved hundreds of thousands of troops fresh from their victory over Russia in late 1917 and launched a massive offensive on March 21, 1918. The Germans employed innovative “stormtrooper” tactics which produced stunning gains during the first weeks of the offensive. At one point they were within 50 miles of Paris. The Allies in their shock and desperation finally did something they should have done back in 1914—they appointed a Commander-in-Chief (General Ferdinand Foch) with authority over both the French and the British armies.
The Germans launched three further offensives in different sectors of the Western Front in April, May, and June. They hoped the steady pressure would cause Allied morale to crack and lead to peace negotiations on their terms. That’s how they had crushed Tsarist Russia the year before. Military and political morale are fragile and the Kaiser’s big gamble appeared reasonable to the German High Command.
But under Foch the Allies hung on doggedly through that terrible spring. Each German offensive had diminished results as momentum dissipated due to the high casualties and lack of supplies. On July 18, 1918 the Allies turned the tables on the Germans and launched a massive counterattack. Within four months the Kaiser was forced to abdicate and Germany agreed to a punitive armistice. The Germans, so close to victory just a few months earlier, now realized every sacrifice had been in vain—they had lost the war.
Now readers might be wondering what all of this has to do with investments. Nothing directly, but it does point to some common human behavior. Sometimes we overreach and fail to ask “How much is really enough?” If the Germans had reinforced the Western Front and NOT rolled the dice for total victory (remember they had won a decisive victory in the East against Russia), might the Allies have considered an honorable peace? How much risk should an investor take in a portfolio?
Oftentimes it seems to take a real crisis to induce people to do, what in hindsight, was obvious. For the Allies taking nearly four years to unite the allied command seems incredible. Yet how often do investors delay making decisions that they know make sense, such as recognizing a loss before it becomes a real drag on a portfolio?
People have difficulty differentiating situations and thereby fall into misleading analogies. The Germans beat the Russians by breaking the morale of the army and of the Russian people. In 1917 the Russian economy was collapsing, food was scarce, and no Yanks were coming to rescue them. No wonder morale shattered. A clear analysis of the Western Front in early 1918 was quite different. The French and British armies were intact, well fed, and amply supplied. The Home Fronts were tired but still solidly behind the war effort. And most important for morale, the Yanks were coming. By summer the Allied forces would easily outnumber the Germans. Victory by 1919 was a real possibility.
The Germans still might have won in the spring of 1918, but their odds were not good. They should not have put much weight on their Russian experience when assessing their chances in the West. For investors false or misleading analogies, especially from Wall Street, are all too common. How many times have investors heard that Company X is the next Apple or Amazon? Do they ask what characteristics Company X shares with Apple or Amazon that demonstrably led to their great financial success? Are the analogies valid or mere wishful thinking?
Finally, sometimes people win by just staying in the game and awaiting their opportunity. General Foch stayed on the defensive from April to July and absorbed everything the German army could deliver. When he sensed that the German momentum was spent, he counterattacked and led the Allies to victory. In the stock market, patience and sticking to a discipline (whether it’s value investing or trend following or growth investing) has the best chance of success. As in war, nothing is guaranteed, but patience and tenacity usually triumph.
Posted on May 11 2018
by Bill Miller