Shock events like pandemic and natural disaster are unavoidable
It is important to note that pandemic, epidemic, and disaster are unavoidable events in human history. In recent years, we have seen numerous major natural disasters including the 2011 earthquake/tsunami in Japan (16000 deaths), 2004 Indian Ocean earthquake/tsunami (230,000 deaths), 2003 European heat wave (70000 deaths). Man-made disasters (military wars, trade wars and political crises) also happen frequently including the current US war with ISIS (2014-present), trade war with China (2018-present), the Iraq war (2003-2011), September 2011 terrorist attacks, Nixon Watergate scandal and Clinton impeachment crisis. History tells us as long as there are human beings, there will be human conflict. Therefore, we should expect disasters and shock events like a coronavirus outbreak to continue happen in the future.
Shock events are short term in nature, but investing is for the long term
While pandemics and disasters are terrible events, they are typically transient in nature. On the other hand, investing is a long term activity more like a marathon, and not a sprint. Therefore, it is unwise to make investment decisions based on the impact of shock events and disasters. Those who do are really speculators who pretend to be investors (there are many of these today). A company’s true value is derived from its future cash flow generated over the next 5, 10, 20 years, not just this or next year. For example, a company that is losing money today but highly likely to become profitable and thrive over the next 20 years is likely worth a lot more than a company that is very profitable today but in slow secular decline. Also, a company that is growing rapidly during the boom times but will likely collapse during bad times is not worth very much. Unfortunately, most individual investors cannot figure this out by themselves. All they can do is to watch the news and analyze the stock price charts which makes them momentum investors and speculators only.
Control your emotions and focus on the facts
Emotions are what make us human. We have two highly developed system inside our brain – reasoning and emotional core. Thousands of years ago when we still lived in the wild, we needed emotions in order to react quickly to dangerous stimuli. If faced with a tiger, it’s better to be rocked with a fear so strong it triggers a rush of blood than to sit around and theorize about the threat. We developed an emotional system because it could induce quick responses to danger. Our sense of fear help us survive and thrive on earth since the prehistoric ages. However, this same sense of fear often causes us to over-react to short term threats in today’s more civilized life.
We think that the media is partly responsible for over-stimulating our emotions and amplifying our fears. In order to attract eyeballs, increase viewership and sell more advertisements, the media often focuses coverage on the dramatic, entertaining and graphic events. After all, no one wants to watch daily news that cover only highway accidents and regular flu deaths.
It is important to strike a good balance between rational reasoning and emotions. We believe that what makes a successful investor is the ability to control his/her own emotions and focus on the facts. During turbulent market times, we fight hard to do exactly that and we admit it is difficult to do.
Facts show the regular flu virus is a much bigger pandemic than the new coronavirus
In China, the fact is about 10,000,000 people (0.74%) die every year from illnesses, accidents and suicides.
In the US, the fact is almost 2,800,000 people (0.9%) die every year from illnesses, accidents and suicides. That means every day more than 8000 people die in the US. Out of these three million annual deaths, an estimated 61,000 Americans died of influenza (regular flu) and its complications in the 2017-2018 winter season. At this point in the 2019-2020 flu season, CDC estimates indicate that there have been 19-26 million influenza illnesses, 180,000-310,000 hospitalizations, and 10000-25000 flu-related deaths. These regular flu statistics make Wuhan’s coronavirus 17000 global cases and 360 deaths (as of February 3rd) insignificant.
The fact is the regular flu virus infects 10-20% of population, kills a lot more people and it does so every single year around the world. Therefore, we should be 10x more vigilant against the regular flu virus than the new coronavirus. Also, even though every age group can get infected with a regular flu virus, the risk of death after illness is significantly higher among the elderly above 65 versus the population (0.9% vs. 0.1%). To help prevent all the seasonal flu illnesses, we should all adopt good hygiene habits. While draconian measures to ban transportation, travel and gathering are also effective, they come at a high cost to the economy.
Make sensible asset allocation and construct shock-proof portfolio BEFORE crisis happens
At InVision Capital, we invest based on the assumption that pandemics and disasters will continue happen in the future (hope not too frequently). Instead of reacting to every shock event, we start our investment process by performing sensible asset allocation (cash, gold, bond, equity, real estate) that reflects the unique risk exposure and tolerance of each individual client. Then we try to construct a shock-resistant portfolio consisting of companies with geographically diverse operations/markets and low key person/product/political risks. Every individual person has an unique investment risk profile based on age, income, expense, lifestyle/future needs, asset base and home country location. For example, a technology professional couple who owns real estate only in the Silicon Valley and invest only in technology stocks is putting all his/her eggs in one basket – a risky move. The risk is especially high if that person lives in a developing market country like China with high geopolitical and business cycle risks.
The Bottom Line
For a normal person, performing global asset allocation and building shock-proof portfolio is not an easy task (lack of global perspective and product knowledge). Even more difficult is controlling one’s emotions and fighting the media reporting biases when shock events occur. Therefore, we believe that very few people can achieve investment success by just watching business news and buying stocks recommended by market commentators. Those who do are just very lucky people. At InVision, we are here to help you build financial independence no matter what might happen in the future.