Hitchhiker’s Guide to the Galaxy, a witty and charmingly bit of Douglas Adams’ absurdity, is a favorite sci-fi book. It begins with a great reveal to its protagonist, Arthur Dent: His friend Ford Prefect explains he is not a human, but is actually from a planet near the star Betelgeuse. Oh, and the Earth is about to be destroyed by the Vogons, who are building a hyperspatial express route straight through our solar system. Ford lends Arthur his copy of The Hitchhiker’s Guide to the Galaxy, which gives good advice even before you open it:
“It is said that despite its many glaring (and occasionally fatal) inaccuracies, the Hitchhiker’s Guide to the Galaxy itself has outsold the Encyclopedia Galactica because it is slightly cheaper, and because it has the words ‘DON’T PANIC’ in large, friendly letters on the cover.”
People don’t like being told what to do, and when agitated really dislike being told to be less agitated. So rather than just tell you not to panic (if I can find a font to express that in large, friendly letters), today, I prefer to share some thoughts about what is going on right now, this week, and perhaps the next quarter or two. Beyond that, anyone making forecasts is just guessing.
Media coverage of Covid-19: There is a lot of information — and misinformation — online and in the press. Even the things the media gets right are often inflammatory and misleading. (See e.g., this WSJ map as an example). All of the various techniques we have discussed over the years applies here: Make sure you are reading trusted sources and avoiding clickbait nonsense. Be aware of those who use the virus to garner eyeballs and web traffic. (3.11 Update: See this)
Even when the press gets it right, however, they create a false perception of what this potential pandemic is: 24/7 coverage implies nothing else matters all that much, and we must all focus incessantly, obsessively on the virus. That is a misleading, disingenuous strategy.
Markets: We all have a tendency to look at market action in the here and now; human psychology is temporally geared for immediate threats — not the broader context of longer time frames. Hence, these shorter-term drops need to be placed into the context as follows: Off the lows of December 2018, the markets have rallied ~35%; those gains in such a relatively short 14 month period create an air pocket beneath.
I don’t want to understate this: 11% off the S&P 500 index in a week is a big drop. However, the market is pricing in the likelihood of a substantial decrease in economic activity and the possibility of a global recession.
This is not 2008-09: I have discussed the many things that led up to the Great Financial Crisis (GFC) but the key is the debacle began within the structure of finance itself. Securitized loans were everywhere, as were derivatives. Even worse, there was a direct feedback mechanism between the economy (e.g., real estate) and finance (e.g., mortgages). That tight relationship ensured that credit, finance, market structure, economics, employment and GDP all were closely tied together. While the supply chain is global and the nature of modern economies are interlinked, we don’t see anything remotely systemic this go around. (Update: Point by point comparison between 2008 & Today)
Economy: The economy is slowing, likely temporarily, but perhaps significantly, as people hunker down, work from home and go out less as they wait out for the economic impact to pass. Stocks are appropriately pricing this in. The assumption is energy, travel, leisure, dining, retail and business travel sectors will all suffer large fall offs in revenue and corresponding decreases in profits. Historically, pandemics should be transitory, lasting weeks or months but likely not years. Knowing this should help you put the moment into this a bigger picture.
Investing: It is probably too late to sell and too early to buy. Regardless, you should not let even a global health freakout panic you into doing something you will regret later, including unplanned panic selling.
It always comes down to this: Have a plan, make sure it is one you can live with, and execute it faithfully. Trying to make decisions on the fly in an emotional environment of unknown outcomes is an expensive exercise in folly.
Trading: Assuming you have a “fun” trading account of 5-10% of your liquid assets, make a list of what you would like to own 20, 30, 40% lower, and be prepared to buy into a deepening panic. Don’t pick a point, but plan to leg in as markets fall over time, then pyramid as they recover. Look at a chart of 2008-09, assume this only gets 40-60% as bad, and figure out what you would like own much cheaper (save a small slug of capital in case it is worse). You will not catch the bottom, and you will look foolish for a while; in a few quarters you will be grateful.
Note: Accounts like this should be able to do well or poorly (including going to zero) without impacting your standard of living or financial plan.
Understand what is in your control: Panic comes from the sensation of lacking control; not knowing what to do about it, as some external event forces you into a threatening situation. Recognizing this reduces the sensation of fear. Having a plan and understanding that most everything else economically and market wise are beyond your control is a good way to manage your anxiety.
Uncertainty: No one knows what the future holds and most of the time we really do not know what is truly going on in reality. But we pretend via a series of cognitive lies, optimism and false confidence. When you start to see people in business and government discuss “uncertainty,” that is there tacit admission they really have no idea WTF is going on.
Back to the Hitchhikers Guide:
“This planet has—or rather had—a problem, which was this: most of the people living on it were unhappy for pretty much all of the time. Many solutions were suggested for this problem, but most of these were largely concerned with the movement of small green pieces of paper, which was odd because on the whole it wasn’t the small green pieces of paper that were unhappy.”
That insightful observation leads to our final conclusion: Have a plan, make sure you understand it and can live with it during times like this, and be aware that many of us can be our own worst enemies.
“Don’t Panic” is the best advice I have ever been given; it is applicable in every situation I am familiar with, whether Vogons are about to demolish your planet or when the S&P futures market are set to open lock limit down. Panic does not make anything better and often makes things worse — occasionally much worse.
Defining Risk Versus Uncertainty (December 10, 2012)
Reduce the noise levels in your investment process (November 9, 2013)
Have a plan, and stick to it. (July 2, 2016)
Re-Engineer Your Media Diet (February 2, 2017)
Markets Are Up 30% YTD. Your Portfolio Is Not. Here’s Why. (December 19, 2019)