Avoiding Investment “Maginot Lines”

Russia’s invasion of Ukraine highlights how reality often moves far faster than the elaborate narratives and structures common in complex societies.  For instance, the intense debate about the pros and cons of Ukraine joining NATO has been going on for decades and peaked at the time of the invasion in early 2022. (See the attached Google Trends chart.)

It is now utterly moot. Think about it: NATO was created to orchestrate a defense of Western Europe against a Soviet land attack, most likely through the Fulda Gap from the then East Germany. When the Soviet Union collapsed in the 1990s, former Warsaw Pact members fled West to NATO, along with the Baltic states. That moved the boundary and area of potential conflict between Russia and NATO much further to the East.

Fast forward thirty years and Ukraine is now fighting the ground war that was NATO’s raison d’etre. NATO may be paying the bills and providing the equipment, but a nominally non-NATO, European country is doing the fighting and directly countering Russia’s move west. Formal membership in NATO turned out to be irrelevant. Ukrainian officers will be teaching at West Point and Sandhurst for decades to come, as well as re-writing the books on ground warfare in the 21st century. It is a stunning turn of events.

A second example is related to the first. Germany’s Green Party has been striving for more than 40 years to shut down the country’s nuclear power plants (among other goals). In early 2023, as part of Germany’s ruling coalition, they finally achieved their long-sought goal. But by the time they did, it was moot. In the past few years, the world had changed dramatically and getting rid of nuclear power turned out to be bad for the environment and bad for Germany.

History offers numerous other examples. The Maginot Line in France comes to mind. It was built after World War I as an “impregnable” line of connected fortresses on France’s eastern border with Germany, But advances in technology and strategy resulted in the German army going around it quickly in 1940. An elaborate defense paradigm was rendered moot overnight.

It’s not hard to find other examples, not just military, in modern society where necessarily complex and slow-footed structures are outpaced by circumstances and technology. From an investment perspective, the issue is stranded assets.  For instance, over the past several decades, many large corporations built just-in-time global supply chains designed to maximize efficiency and their corporate financial optics. But over the past three years, the global neo-liberal order supporting this paradigm came crashing down on the basis of Covid, China, Russia, and divisive US politics. Supply chains are now being hurriedly rejigged to emphasize efficacy, resiliency and redundancy.

Getting stuck with expensive “Maginot Line” assets after an abrupt paradigm shift constitutes a low probability, but high impact event. Such “fat tails” properly dominate a lot of investment risk analysis. Indeed, in my day job, I am regularly asked how this or that shiny new object is going to “disintermediate” overnight an existing, fixed-asset business. The threat of stranded assets doesn’t materialize anywhere near as frequently as the question is asked, but the exercise is an important one for managers of risk, that is, for all investors.

Feel free to chime in with your own “Maginot Line” examples.