In this edition, I talk about Covid-19 and its effects on investments.
When discussing Covid-19, we must keep in mind two things:
Exponential growth
Unknown risks
Covid-19 numbers are small, but the spread rate of the disease is high. Our minds are not wired to grasp exponential growth, so we shouldn’t trust ourselves to understand it intuitively. The magnitude of a multiplicative process can easily surprise us.
In exponential growth, any change in growth rates makes a difference. A small reduction in the spread rate (r-naught) of Covid-19 can have outsized effects on the number and timing of people infected. The number and timing of people infected can have outsized effects on the outcome of the disease.
Many people think the worry about Covid-19 is dumb. I think whatever conclusion someone might take from this situation (positive or negative) is bullshit.
(Despite this interaction, Taleb still loves his Tesla)
Covid-19 is a second-order risk, a known unknown risk. We know Covid-19 is here, but we don’t know what the consequences are. When we don’t know the risk, the most rational thing to do is to take precautions (precautionary principle). You don’t want to enter a bet in which you don’t know (1) the odds of losing and (2) how much you can lose.
It’s impossible to draw conclusions from Covid-19 numbers. Countries have different testing procedures. The ones that show a higher rate of infection could be testing more patients, including after-death testing. Furthermore, death rates are a lagging indicator because people take time to die. Besides, this is a sensitive subject that impacts the political and economic interests of nations. A sensitive subject in a complex environment is prone to manipulation. Incentives are powerful. Thinking otherwise is loserthink.
Let’s assume numbers reported are true. People focus on Covid-19 death rates, which is a direct effect of the virus. But Covid-19 can have indirect effects. I think the most disturbing indirect effect is the potential overburden of the global health system and the social and political consequences that could follow.
Consider that if too many people get infected, hospitals may get crowded. Lack of ICU beds for those in need could cause more deaths from Covid-19 and other conditions. Also, we may not have enough health care professionals to deal with this thing because many of them may get infected and have to be quarantined.
Lock-downs, like the ones seen in China and Italy, may extend to other countries. Political, social, and economical consequences could follow, like rigid international travel restrictions, bankruptcies, and the death of important political leaders. No one can predict how it will all turn out.
I have no opinion on what the outcome will be, but we can take measures. Collectively, governments and businesses might want to follow this.
On a personal level, you should wash your hands constantly, avoid traveling, work from home, stock up some supplies (toilet paper is not the priority), watch your immune system (sleep more, drink less, eat healthy), and self-quarantine if symptoms arise. Note these are moral obligations since the problem goes beyond the individual: Being infected is not the end. You become the means by which the virus spreads.
That said, let’s talk about investing.
Investing Under Uncertainty
Buy when they are literally giving it away - Kiril Sokoloff
Markets have tanked. Until we figure out what Covid-19 is about, markets will continue falling. The situation could trigger a global recession that could last years, or markets could go back to bull mode next week. We just don’t know.
That doesn’t impact my framework for stock selection. But at a portfolio level, I’ll tell you what I’m doing:
Keeping a higher cash balance
Looking for opportunities to buy high-quality, low-risk stocks at very cheap prices
Cash is king. I don’t know how long a recession might last and how long markets could stay in bear mode (if that happens at all). Regardless, cash gives me optionality to buy if some incredible opportunity appears or to watch from the sidelines.
In times like these, patience is key. I think incredible opportunities to buy high-quality companies (low risk, great business) at a very low price could appear. The baby often gets thrown out with the bathwater. This is the moment in which you find bargains you thought impossible before.
It’s not about timing the market, but being patient.
Please tell me your thoughts and comments.
Thanks for reading,
Fred
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