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  • Chris Mayer

Thoughts on the Coronavirus

This coronavirus had me digging into my investing library last week. I meandered over my bookcases of investing memoirs, histories, diaries and essays looking for some insights from the epidemics and health scares of the past.


I sent out a note to my partners in Woodlock House with some of my findings, specifically as it regards our hardest hit holdings. In what follows, however, I’ll share my general impressions of this survey and the most important takeaway of all.


My first impression is that there have been a lot of epidemics and health scares in financial history. Some examples include SARS, Avian flu, Dengue Fever, Swine flu, Ebola, measles and Zika. And that’s just a post-2000 sampling.


Second impression: the impact of these things on markets is hard to suss out. There is so much else going on. It gets complicated very quickly. Plotting out charts that show how various market indices performed as a virus played out doesn’t tell you much.


But the most important takeaway for me was how little the headlines of the day seemed to matter when you look back on them years later.


For example, consider Diary of a Hedgehog, by Barton Biggs. Biggs was too "macro" for me. But he often did have interesting things to say and he was a good enough writer that I looked forward to reading his work. I have several of his books: Hedgehogging, War, Wealth & Wisdom and Biggs on Finance, Economics and The Stock Market. They are all worthwhile in different ways.


The Diary is perhaps the least well known. It is what it says it is: Biggs’ daily notes on markets as they unfurled in real time. A sampling of some of the concerns, taken at random:


· July 8, 2010: worries about weakening economic data, S&P500 hits low for the year in June, Treasury bonds at low mark for the year

· September 10, 2010: Three-quarters through the year and “nobody’s made any money,” expresses concerns about low volatility

· December 7, 2010: look at the strong showing of the global PMI survey, worries about China being in a bubble

· March 9, 2011: writes about low yields, concerned about rise in US home prices, rising oil prices

· May 1, 2011: fears of rising inflation, baffled by rise in Treasuries, worries about European debt

· October 31, 2011: writes about the four week rise in US markets, rise in copper, worries about a downbeat Case-Shiller index, some chitchat about GDP forecasts


Okay, you get the idea. Reading over these, it really hit me how little any of it mattered. He would’ve better off finding great companies and telling his readers to hold on… over and over and over again.


I don’t do this to pick on Biggs. His diary is representative of these kinds of books. I also keep a diary, which I would definitely recommend doing. And reading back over my old entries is always humbling.


Even last year, there are things I wrote in my diary that seemed so important to me at the time, but I’ve nearly forgotten about already. Stock price moves that seemed momentous at the time – a 15% rally here, a 10% drop in a day there – now mostly look like barely distinct and certainly inconsequential legs in a longer chart of meandering transactions.


This is the value of financial history to me. Not in the particulars of what happened when, but in distilling the idea that there is a whole lot that happens and very little of it matters. Financial history is mostly noise. There are very few really big turning points in financial history. Will coronavirus be one of those defining moments? Will we still be talking about this ten years from now? Five years from now? I doubt it.


I am reminded of Rory Sutherland’s excellent book, Alchemy. He writes about the “focusing illusion,” which makes whatever you are thinking about at the moment seem really important. Sutherland writes: “One way you can improve your happiness is by learning that such an illusion exists, and by controlling what you pay attention to.”


I think the best way to deal with this coronavirus is to take the long view. Eventually it will be contained and it will be just another data point in the table of past viruses. If anything, take advantage of the weaknesses to add to your favorites (which is what I did). Otherwise, sit tight.


One thing to be careful about


Westley: You're that smart?

Vizzini: Let me put it this way. Have you ever heard of Plato, Aristotle, Socrates?

Westley: Yes.

Vizzini: Morons.

- From the film The Princess Bride


There is always a tension when you are an investor. On the one hand, you want to criticize the market as stupid or crazy. (I’m guilty of this too. I mean, have you seen Tesla’s stock? Come on.) You did the work, you made your judgment and you believe in what you’re doing. These other morons in the market don’t know what they’re doing. Why can’t they see what seems so obvious to your genius?


Of course, you need a great deal of confidence to invest well. I’ve long held that’s the real reason you do all that work on a company in the first place. Not because you’re necessarily going to discover something nobody knows, but because with deep understanding comes the ability to hold on.


But that doesn’t mean other people are stupid or crazy. I always liked one of the tenets of investing Marty Whitman laid out in his book Value Investing: “No market participant is assumed to be crazy or stupid.”


Basically, Whitman says, different approaches can be rational in their own contexts. For example, IPO pricing is different than if a company remained public – but both can make sense in their respective contexts.


Klarman, one of the greatest investors ever, said a similar thing in his letter this year:


“[T]here is no universal formula for determining the underlying value of a business. Each of us can reasonably make different assumptions, plan for different time horizons, develop differing projections, and employ different discount rates when undertaking such an assessment.”


Or people can buy an ETF and say the hell with it. But seriously, valuations are matters of opinion. They can vary widely and still be rational in a certain context. So when you see a stock that looks out of whack to you, it might be. (Tesla?) Or it may be that it is rational, just from a different set of assumptions. Both could be “right,” at least for some period of time. Just play your game. Stick to what works for you. And don’t worry too much about other people.


None of this is easy, but it’s a balancing beam all the great investors seem to walk.


Thanks for reading.


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Published February 4, 2020

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