As
I write this blog financial markets are entering free fall due to the
events surrounding coronavirus in the last few weeks, no more so than
in Italy.
It certainly seems a very difficult and strange time to be living in,
and clearly is spooking the financial sector. However, in this blog I
want to offer some rational thought about this and why this is neither a
time for panic nor something that we should
think is out of the ordinary. It is certainly unprecedented from a
health point of view and I hope you can remain safe during this time,
but it is just another ' unpredictable' event from the perspective of our money and will have the short
term effect of scaring investors.
We should all think back to the events of 2008 / 2009 and remember the
thoughts and feeling we had when the world's media told us that we were
heading into a financial crisis of unforeseen proportions and that
Armageddon would prevail. This is no different,
from a financial point of view, and should be thought of no
differently. It will throw up opportunities for those who are sitting on
cash and should be a time of reflection and restraint for those of us
who are fully invested.
I would like to add that I do not wish to minimise the effects of this
virus in any way. I understand that there could be many at risk, myself
included: I have suffered from asthma all my life, and we also have
members of the family who are at very high risk
of developing severe problems from the virus if everything we are to
believe is true.
But we can put things in perspective. Just this morning I received this as part of an asset manager review of the situation:
'Away from the frightening headlines there is a glimmer of
hope. The bad news is that the virus has now gone global and will
undermine economic activity outside of China. Within China, however,
the number of new cases is falling, the trend in recoveries
is encouraging and economic activity is starting to resume. Beyond
the next month or two, the turnaround in China may gradually spread
abroad'.
Equally, what I am about to write should in no way be taken as a
conspiracy theory and born out of superstition. I am going to write
based on historical facts and reflect on the behaviour of humans. We
have tended to exhibit and repeat the same patterns of
behaviour in very similar circumstances throughout history
EXTRAORDINARY POPULAR DELUSIONS AND THE MADNESS OF CROWDS
This is the title of one of my favourite books written in 1841 by author Charles Mackay.
It is one of my favourite reads because it is a historical account of
the typical behaviour that we, as humans, exhibit repeatedly. There are
many examples throughout history, which are discussed in great detail in
the book and which I will come to in a moment,
but let me ask you:
Just because all the governments around the world, all the
doctors, all the councils and all the media say that coronavirus could
be the greatest threat to mankind, does this make it true?
This might seem a rather provocative statement to be making at this
particular time, just when the whole of Italy is in lockdown, but it
does bear thinking about for a moment. Some suggest that the coronavirus
may be no more serious than the regular flu, although
some estimates suggest it may be worse. The facts to date cannot prove
either way. Clearly, given that we have no idea how it will manifest
itself, it makes sense to adopt urgent measures but it may turn out to
be no more than another SARS / MERS / Ebola (interestingly
Ebola virus kills 9 out of 10 people who get infected, but the alarm
over that was no where near the panic over coronavirus). In addition, we
have had panic surrounding mad cow disease, swine flu and avian flu.
None of these have gone on to prove to be any
more than a passing moment of concern and affected a small proportion
of the population overall.
The book I have mentioned above is well worth reading, if you have the
opportunity, and explains how as humans, we tend to exhibit behaviours
which reinforce one another. In our particular case, the government
creates the alarm, therefore the doctors must respond
with equal alarm and response / preparation (they are after all paid by
the government), the media equally react in an alarmist way because it
helps them to sell their services, the people become alarmed and start
stock piling because they feel under threat.
The problem is that is it is now hard, in a communal state of panic or
enthusiasm, for one to stand out and say 'maybe this is not the case',
because they are ostracised or ridiculed and called out for being
unreasonable.
But don't just take my word for it. Let's look some of the evidence:
GREAT RECESSION 2008 / 2009
Merely 10 years ago we had a very similar experience, when financial
markets collapsed after the bundled mortgage debt crisis that lead us
into the crash of 2008 / 2009. However, isn't it interesting that
leading up to this crisis, economists and central banks
told us that the world was in permanent state of growth and could
likely maintain 3% per annum; estate agents told us that property prices
would keep on rising; even banks and financial institutions believed
the hype and continued to offer highly risky investments
to risk averse investors because they believed that stability was the
new norm:
The Guardian 30th January 2007: Still going through the roof - the property boom goes on
Fortune 500: July 12th 2007: The greatest economic boom ever
Harvard Business School: 27th December 2007: Chimerica’ and the Global Asset Market Boom
No one could challenge the norm at the time, for fear of being branded
the one who wanted to end the status quo. The same logic applies to
financial exuberance as it does to fear about a global pandemic. Just
because everyone says it will be this way doesn't
necessarily mean it will be. (If you haven't seen the film, 'The Great
Short', then I would suggest it as a great example of the treatment of
those who go against the masses).
TECH BOOM 2000
For those of you with a memory of the events surrounding the financial
market collapse of 2000, you might remember that running into the
collapse we were told that the internet would change our lives forever
and in ways that we could not imagine. The theorists
were absolutely right. But unfortunately, they had not thought to add a
timeline to that prediction. Financial market exuberance took over
followed by collapse. At the time economists, central banks, financial
institutions and pundits in the media bought into
the same rhetoric, that the internet would reshape our lives
immediately. Little did they know that it would take about another 10
years for the effect to happen. Just because everyone says it will be
this way doesn't necessarily mean it will be.
Let's go back a bit further and use some examples from the book:
WITCH MANIA
In the mid 1400s Europe was fixated with the idea that every calamity
that befell a person was the cause of a witch. Here is a passage from
the book:
"But in the early days of 'little knowledge' this grand belief
because the source of a whole train of superstitions, which in their
turn, became the fount from whence flowed a deluge of blood and
horror".
The writings are not a million miles removed from the fear surrounding
coronavirus. In this case, just because everyone said it was true didn't
mean it was. More horrendous is that those who challenged the belief
were deemed to be witches themselves and didn't
live to see their reality come true.
THE CRUSADES
I won't go into the historical account of how the Crusades came about,
but we can reflect on a passage from the book, which in some ways
mirrors what we see today:
"Fanaticism and the love of battle alike impelled them to war, while
the kings and prices of Europe had still another motive for encouraging
their zeal . Policy opened their eyes to the great advantages which
would accrue to themselves...Thus every motive
was favourable to the Crusades. Every class of society was alike
incited to join or encourage the war; kings and the clergy by policy,
the nobles by turbulence and the love of dominion, and the people by
religious zeal...skillfully directed by their only
instructors".
Lastly, I will take a phrase from the chapter:
POPULAR FOLLIES OF GREAT CITIES
This phrase is to illustrate the power of the word to spread far and wide and for superstition and hypothesis to become fact:
"And first of all, walk where we will, we cannot help hearing from
every side a phrase repeated with delight...by men with hard hands and
dirty faces - by saucy butcher lads and errand boys - by loose women -
by hackney coachmen, cabriolet drivers, and
idle fellows who loiter at the corners of streets...it seems applicable
to every circumstance, and is the universal answer to every question;
in short, it is the favourite slang phrase of the day, a phrase that,
while its brief season of popularity lasts...throws
frolicsomeness over existence and gives them motivation to talk as well
as their more fortunate fellows in a higher stage of society".
MONEY MATTERS
So, to bring the subject of this E-zine back to money matters for a
moment I would like to write that what we do and how we act now is of
utmost importance to the long term health of our personal finances.
Most people will be in one of two situations right now. The first are
those who, for whatever reason are sat on cash which is available for
investment. Whilst financial market collapses might seem the worst time
for investment they are quite the opposite. They
are the greatest opportunities. The opportunity to see substantial
gains on investments when the volatility settles. It is in no way easy
to invest when market indicators are all red and the financial media are
professing Armageddon, but they are wrong. I
know this from experience because I had the fortune to have some cash
in 2008 when the financial crisis happened. You have to get through the
volatility and the psychological reluctance, but long term returns on
most assets during these times are substantially
greater than at other times.
However, a word of caution. Financial crises can create
imbalances in certain sectors. It is wise not to just jump into any
asset during this time, but to invest in a well balanced portfolio based
on your own attitude to investment risk.
The other class of investor is those who are fully invested (I include
myself in this category). We are investors who have been invested and
should remain invested during these periods (not accounting for anyone who must disinvest because of cash needs).
Panic is not an option. Level headedness must prevail. And if you are
unsure of what to do then you can always pick up the phone and speak
with me. This is the fifth financial market crash of my career. I have
coached many clients through periods like these
and suspect I will have to coach many more, so if you are in doubt then
please do get in touch and we can talk about how it affects your
personal situation.
If you are a client who has invested capital through one of our selected
group of asset managers then please feel comforted that they have
everything under control and have made provisions for these unforeseen
events (i.e investing a proportion of the assets
in gold and other low volatility safe haven assets, and been sitting on
cash for some time). What we are going through is quite normal and I
suspect will be something we look back on with great interest in the not
so distant future.
In the meantime, if you yourself, or anyone you know is at risk from the virus please take all measures to stay safe!
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