Coronavirus and your portfolio

People used to think that plagues were sent upon the world by the gods or by god to reflect their or his (rarely her) anger.

Plagues could wipe out a third of a population.

Doctors relied on tradition and superstition, not evidence and science.

Things have got a lot better since then luckily. It’s important to put things into perspective.

Epidemics are rarer, and fewer people die now than in any measurable period in history. SARS, Ebola, and various avian flus have not decimated populations. The Spanish flu killed 2.73% of the global population and was the worst by miles, but that was 100 years ago. Nothing has killed more than 0.12% since then, and that was in 1970.

Compare that to the bubonic plagues of the 14th, 15th, and 16th centuries, which repeatedly killed a third of people in large parts of Europe.

The reason it’s important to remember this is because it reminds us how much better we are at dealing with these things.

So from a purely progress-based, statistical analysis with no medical input whatsoever, my guess is that this plays out as normal, getting worse for a few weeks before the authorities get up to speed and start regaining control of the situation.

Despite not being a medical professional or expert, every advance of the last 10, 100, or 500 years tells me that we don’t have another plague or Spanish flu on our hands.

However, from an investment perspective, it may not need to be either of those to be significant. Maybe a few weeks of panic, and a few basis points off China’s GDP figures will be enough to scatter the pigeons (bulls).

When you’re building a tower, the higher it is, the easier it is to topple.

It takes quite a lot to flip a car wheel that’s lying on its side – it has a wide solid base and a low centre of gravity.

But a telephone pole resting untethered to the ground could almost be blown over with a whisper, or a gentle tap at the very top. It has a narrow base and a high centre of gravity. It’s fragile to a shock.

That’s closer to where markets are today. They are very fragile to a demand shock or a turn in the tide of investor sentiment.

Valuations being high isn’t a reason for them to go down tomorrow.

But markets trading at all-time highs and Tesla tripling on the news that it continued to lose excessive amounts of money are evidence that when a shock comes, equity markets could be more unstable this time round.  

Nassim Taleb, a great thinker, author and investor talks a lot about fragility, and encourages people to seek out anti-fragile assets in times like these. I’m sure I’m doing his work a gross injustice by abbreviating it to such simple terms, but the idea is to look to own assets that ought to benefit from a shock to the system, whatever that is. That’s how he made most of his money at least.

Think things like gold, some cryptocurrencies perhaps, certain bonds, a few companies or sectors which might do well (the Japanese mask-making company is the current trending example).

Taleb’s “barbell” strategy consists of holding mostly anti-fragile or safe assets (cash, gold, certain bonds). Meanwhile, an investor can use the small portion of remaining capital to invest in things with enormous potential returns (and high risk) – cryptos, or whatever stocks are hottest right now.

That way your downside is probably limited to the losses on the 10% or 20% invested in high-risk high-return assets, but if things go better than expected, then those things will outperform wildly, giving your overall portfolio a decent return.

The point is that in such a portfolio, a black swan (in this case the coronavirus) could only destroy value in a small portion of your portfolio. And either your losses are limited, or the gains from your anti-fragile assets counterbalance or exceed them.

In a positive environment when the risky assets do well, the main loss will just be opportunity cost, and this is more palatable as it dwells on the mental balance sheet, not the real one.

Many of the world’s greatest (and now oldest) investors maintain that the surest way to long-term wealth, or a happy retirement or whatever you’re investing for in the long term, is not to make extraordinary gains, but to avoid extraordinary losses. It’s a valuable lesson.

In Aesop’s fable of the oak and the reeds, the oak strains and grimaces, unmoved against the fierce wind, before ultimately being overcome and crashing down with an almighty weight. The reeds meanwhile, low and flexible, simply blow in the wind, not fighting it but accommodating it.

Now seems like a time to be among the reeds, to seek out wide bases and low centres of gravity. Things that can withstand shocks to either demand or sentiment.

Or maybe it’s just a good time to take some of your well-earned profits. Remember, it’s not a gain until you realise it. The trick is to avoid crystallising big losses after the event – but that’s easier said than done.

What drives markets – fundamentals or psychology?

The coronavirus epidemic will have two discernible traits. Its actual impact, and its perceived impact.

If the perceived impact detaches from reality, as it so often does in the case of epidemics, then fear and panic could shatter the fragile valuations in many global equity markets – the US in particular.

China is the bedrock of global growth. Like Atlas holding up the earth on his shoulders in Greek mythology, if China dislocates a shoulder, Atlas could end up strewn on the ground, with global markets crashing down all around him.

That may be a reality that doesn’t come to pass, but it’s not reality you want to watch out for. It’s investors’ perceptions or expectations about that reality.

I’ve mentioned the most obvious answer to all this doom and gloom a couple of times – gold. At the moment, one of our best-performing share advisory services which predicted the breakout of gold in 2019 and led to profits for many of its subscribers as a result, is “on sale”, so to speak.

Find out more about what gold can do for you and your portfolio, what’s in store for the eternal safe haven asset, and the different ways to access gold’s incredible investment case, by clicking this link.

It’s the ultimate anti-fragile asset.

All the best,

Kit Winder
Investment Research Analyst, Southbank Investment Research

PS I see Facebook has decided to remove misinformation about cures and the virus. How does it know? How does it decide? What if someone is cured by a cure that they thought was fake? Are they taking responsibility for this legally? More on this later in the week I think.

Tomorrow though, I will be asking: “What does China’s response to the epidemic tell us about the inherent flaws of authoritarianism? And what does it mean for investors?”

Category: Genetics and Biotechnology

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