Pondering a Selloff

Howard Marks once said: That’s one of the crazy things: in the real world, things generally fluctuate between “pretty good” and “not so hot.” But in the world of investing, perception often swings from “flawless” to “hopeless.” As I write this note the S&P500 is down 3.3% intraday, one of its worst single day losses in years, as people’s view about the Coronavirus bounces from contained to contagion. The worry right now isn’t over loss of life but what happens if this outbreak shuts down Global supply chains (factoid:  the US depends on China for 80% of the core components to make generic medication). Let’s walk thru a couple of views on this subject right now:

  1. I have no idea what to think about the Coronavirus, I don’t follow the news. This one is self-explanatory (and probably has the most amount of people?)
  2. Coronavirus worries are overblown. You think it’s a really bad strain of flu and you’re doing your best to ignore headlines. If you were bullish before this you’re still bullish, bearish still bearish. This event hasn’t really changed your view on anything. 
  3. Coronavirus is a growing concern and I don’t know what to think yet: This is a fair position to have, it’s still early in the outbreak. 
  4. Coronavirus is a growing concern, but humanity will prevail. You recognize that you don’t know what the final toll will be on both human lives and economic loss, you are monitoring what is happening and keeping abreast of the news. That being said you think it will eventually fade, that it will be like the Swine Flu in 2009, a new flu strain that will be with us forever. While there will be untold losses this will end up like other pandemics in history. Therefore you will continue to invest knowing that volatility is price of admission to equity like returns. You are focused on your long-term goals and this won’t knock you off your plan.
  5. Coronavirus is a growing concern and I want to make a change: Fear of this has overwhelmed you and you feel compelled to modify your asset allocation. Painful but you just learned a lesson about your own personal risk tolerance: you probably need to hold less equities (or more defensive names) and therefore need to reduce your future expectations about returns. 
  6. Coronavirus is a growing concern and I’m just going to bounce back and forth between stocks, bonds, and cash based on headlines and what my favorite Twitter person says: Good luck to you, this is gonna be really hard.    
  7. Coronavirus is a black swan and I’m worried that it will throw the Globe into a recession: I would argue the people who occupy this space are the same one’s who have been calling for a Bear market for years. This conveniently landed in their lap, none of them were looking for this as a catalyst. If you’re in this camp you’re also likely in #5 so go back there. 
  8. Coronavirus is a permanent change to the Globe. Supply Chains will be destroyed, Countries will shut their borders, the way we used to operate is unravelling before our very eyes. In this case what difference does it make what your stock market view is, we’ll have far worse things to deal with.  

Now is a good time to remind you that “goals-based investing” is crucial to your success. If you put a bunch of money into the market and said to yourself “I don’t know, stocks seem like they are going up, I just want to turn this into more money” then you are prone to failure when events like this happen. You will absolutely bail as scary headlines and plunging markets arrive on your doorstep. Having a long term plan and goals is paramount to being involved in equity markets WHICH ARE RISKY. 

If you look at the history of the stock market there are all kinds of things in there: Wars, Pandemics, Elections, Fear, Greed, Booms, Busts, Recessions, Economic Expansions. You don’t get to choose what environment you invest in, but you do get to choose how and why you invest. Remember, you don’t get to reap the benefits of compounding with your money in a mattress.