10 Million Unemployed Is Nobody’s Fault

Here are some things I’m thinking about now.

WORLD / CULTURE

Do masks prevent sickness? A coronavirus guide on what to do (and not do) to stay healthy: https://www.nbcnews.com/think/opinion/do-masks-prevent-sickness-coronavirus-guide-what-do-not-do-ncna1154641

“…every public health official and organization has been saying there is no need to wear a mask if you’re a healthy, uninfected person.

It’s much more likely that you would get the disease through your hands. You shake the hand of someone infected or touch something that person has contaminated with the virus, then you touch your eyes, mouth or nose, and voilà, you can become infected. That explains why, along with telling you not to bother with the masks, the same public health officials and agencies are shouting at you to wash your hands and stop touching your face.

What are masks good for, then? First, they are crucial for people who have the disease. Remember those drops of saliva? Wearing a mask if you’re sick can help catch a large number of them, greatly reducing the amount of virus that gets into the environment or onto other people.”  

I find any recommendation not to wear masks as the default during this crisis, dubious. I have been wearing surgical masks and latex gloves whenever I have gone out to the grocery store or gas station and discard them before I return to my car. These items are remnants of a time we will come to know as BQ – Before Quarantine. When you have a preschooler in the house, they’re bound to bring home all kinds of cooties. We have made regular use of these items to protect each other from passing illnesses back and forth. I’ve also made regular use of hand sanitizer and wash my hands frequently.

Experts have repeatedly said that the incubation period for COVID-19 can be as long as 14 days (https://www.ncbi.nlm.nih.gov/pubmed/32150748) and many will be asymptomatic during most of that period. Doesn’t it make sense then that as a precaution, we all assume we are infected, and we wear a mask not to protect ourselves, but to protect others potentially? The “expert” opinion here seems to have some holes in it.

Oh, wait a minute, there might an expert that agrees with me…

Should We All Be Wearing Masks In Public? Health Experts Revisit The Question: https://www.npr.org/sections/health-shots/2020/03/31/824560471/should-we-all-be-wearing-masks-in-public-health-experts-revisit-the-question

“Wearing a mask is ‘an additional layer of protection for those who have to go out,’ former FDA Commissioner Scott Gottlieb told NPR in an interview… ‘Face masks will be most effective at slowing the spread of SARS-CoV-2 if they are widely used, because they may help prevent people who are asymptomatically infected from transmitting the disease unknowingly,’ Gottlieb wrote. Gottlieb points to South Korea and Hong Kong — two places that were shown to manage their outbreaks successfully and where face masks are used widely.”

All this business about whether to wear a mask or not underscores how difficult it is for people, even experts in a particular discipline, to asses risk.

Why the Human Brain Is a Poor Judge of Risk: https://www.wired.com/2007/03/security-matters0322/

It seems we are bad at analyzing risk because our brain is at war with itself.

“So here’s the first fundamental problem: We have two systems for reacting to risk – a primitive intuitive system and a more advanced analytic system – and they’re operating in parallel.”

The fight or flight parts of our brains are both activated in times when we need to make decisions, sometimes life and death decisions. The more rational and reasoned part of our brains – the neocortex – are newer evolutionarily, and often loses the battle with the older, more emotional, and reactionary part of our brains – the amygdala. Here’s a good paragraph from the article,

“People are not computers. We don’t evaluate security trade-offs mathematically, by examining the relative probabilities of different events. Instead, we have shortcuts, rules of thumb, stereotypes and biases – generally known as ‘heuristics.’ These heuristics affect how we think about risks, how we evaluate the probability of future events, how we consider costs, and how we make trade-offs. We have ways of generating close-to-optimal answers quickly with limited cognitive capabilities.”

Could it be that a good investor will have a more developed neocortex or a less invasive amygdala than most of us? Perhaps this allows her to navigate potential heuristics to her advantage, the same ones we lean on but are often wrong. Rules of thumb have their place though. They can allow us to make decisions faster. Heuristics might also help with the low-consequence decisions we all need to make every day, which even if wrong, aren’t worth deep time-consuming analysis we would give other more consequential decisions.

One rule of thumb that seems pretty solid is, don’t own lions and tigers as pets…

Netflix’s Tiger King Is the Only Show Crazier Than the World Outside Right Now: https://slate.com/culture/2020/03/netflix-tiger-king-review-joe-exotic-documentary.html

The story of Joe Exotic is, to put it mildly, wild (no pun intended). SPOILER ALERT. Joe Exotic was the P.T. Barnum of big cats and other dangerous animals on a roadside zoo in Oklahoma. I am only half into the second episode. The entire time watching that episode-and-a-half I felt a little pang of anxiety, feeling that any moment, someone was going to lose an arm or worse. I didn’t have to wait long. Joe and the workers at his zoo have proven to be bad at risk assessment. Definitely worth your “Netflix & Quarantine” time.

ECONOMY

U.S. Weekly Jobless Claims Soar to Record 3.28 Million: https://www.reuters.com/article/us-health-coronavirus-usa-unemployment/u-s-weekly-jobless-claims-surge-to-record-3-28-million-idUSKBN21D1WJ

“Initial claims for unemployment benefits rose 3.00 million to a seasonally adjusted 3.28 million in the week ending March 21, eclipsing the previous record of 695,000 set in 1982, the Labor Department said. That also dwarfed the peak of 665,000 in applications during the 2007-2009 recession, during which 8.7 million jobs were lost.”

[UPDATE APRIL 2] A Widening Toll on Jobs: ‘This Thing Is Going to Come for Us All’: https://www.nytimes.com/2020/04/02/business/economy/coronavirus-unemployment-claims.html

“More than 6.6 million people filed new claims for unemployment benefits last week, the Labor Department said Thursday, setting a grim record for the second straight week.

The latest claims brought the two-week total to nearly 10 million.”

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Bear to Bull in Record Time

It’s been a crazy few weeks.

Over the weekend I’m going to spend some time trying to gather my thoughts about the current climate and its effect on your portfolio. In the meantime, here are some quick thoughts at the top of my mind and some information I am reading and consuming.

First, COVID-19… Take care of yourself and the vulnerable members in your family and community. Practice social distancing and wash your hands. Really. It seems COVID-19 is passed along primarily by proximity within six feet to an infected person. Which means, simply breathing near an infected person could be problematic. And, something we all should consider is people who may be infected with the virus are asymptomatic for most of their contagious period due to COVID-19’s long incubation period. It stands to reason we should avoid being in crowded spaces with people we don’t know if we can help it.

Some important links:

Center for Disease Control: https://www.cdc.gov/coronavirus/2019-nCoV/index.html

World Health Organization:https://www.who.int/emergencies/diseases/novel-coronavirus-2019/events-as-they-happen

Also, worth a listen is the Joe Rogan Podcast who recently featured University of Minnesota professor and epidemiologist Michael Osterholm, who is also the director of the Center for Infectious Disease Research and Policy. A good bit of the discussion was around what we can do now regarding COVID-19http://podcasts.joerogan.net/podcasts/michael-osterholm

Second, we hit an all-time high in the stock market. The S&P 500 hit an all-time close on February 19 at 3386.

And then,

We experienced the fastest market drawdown into a bear market, ever. The S&P 500 went from an all-time close on February 19 to bear market territory by March 12. That’s just 22 days (16 trading days). To put some numbers in perspective, during the financial crisis, it took markets 274 days to enter a bear market, and the fastest drop (into a bear) from an all-time high is 55 days back in August 1987.

And then,

After one of the worst single-day drops in the S&P 500 in recent memory, it was followed by one of the best single-day gains. The S&P 500 (price index) declined -9.5% yesterday (March 12) which officially ended the 11-year bull market. It was the worst single-day performance since the financial crisis in 2008. Every position in the index was in the red. It was also the worst day in the Core portfolio’s existence.

But then just like that, the market returned +9.3% today, completing one of the best single-day performances since the recovery from the financial crisis in 2008. The Core portfolio bounced back nicely too.

Market timing is hard. I would say it’s impossible. “Experts” can’t agree on if we’ve seen a bottom, if the recovery will be “L-shaped”, “U-shaped”, or “V-shaped”. They do seem to agree the Trump administration’s, and particularly Trump himself, is incompetent. The chickens seem to have come home to roost. At all our expense. Until now, Trump was an existential threat to mainly brown and black people. Now his incompetency is threatening the well-being of all Americans. And the market doesn’t like it. Fear is rampant in markets. And every time Trump speaks on COVID-19, typically blaming Obama or “Gina” or saying a border wall will keep the virus out, the market reacts negatively.

But, Trump aside,

Market drawdowns are common. This chart shows the maximum intra-year equity market drawdowns since 1980 for the S&P 500. From this, you can see how frequently at least one double-digit decline occurs within any given calendar year. In 20 of the last 39 calendar years—over 50% of the time—the S&P 500 saw a double-digit pullback within the year. In every year, there was a market pullback and on average the market experienced a 13% decline. In the years when the S&P did experience a double-digit decline, 12 of those 20 times—or 60% of the time—the market ended the year with a positive return.

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Which is why,

You should only commit long-term money to the stock market. One of the reasons I am adamant about viewing the performance of your portfolio in five-year increments is because wild stuff happens in shorter time frames. On the other hand, it gets boring the longer you’re invested. In a good way.

S&P 500 TR*1-YEAR3-YEARS5-YEARS7-YEARS10-YEARS15-YEARS20-YEARS
ROLLING PERIODS375351327303267207147
ROLLING PERIODS W/ GAIN62594972400
GAIN FREQUENCY83.47%83.19%85.02%97.69%91.01%100.00%100.00%
MEDIAN RETURN13.63%12.16%11.34%8.69%8.42%8.01%8.23%
MAX ANNUALIZED53.62%32.81%28.56%21.64%19.49%12.21%11.62%
MAX TOTAL53.62%134.27%251.11%293.94%493.38%463.29%800.80%
WORST ANNUALIZED-43.32%-16.09%-6.63%-3.85%-3.43%3.76%5.62%
WORST TOTAL-43.32%-40.93%-29.05%-24.02%-29.48%73.95%198.45%
AVG. ANNUALIZED GAIN WHEN GAINING17.12%14.34%12.28%10.18%10.15%8.01%8.20%
AVG. ANNUALIZED LOSS WHEN LOSING-15.61%-7.53%-1.81%-1.99%-1.24%nana
 *January 1, 1988 to February 29, 2020

In five-year periods, the S&P 500 has had a positive gain 85% since 1988. The average annualized five-year gain of the S&P, when it had a gain, was 12.3%. But in the few five-year periods where the S&P lost value, it lost only -1.8% per year. In other words, since 1988, an investor in the S&P 500 had an 85% chance of gaining 12% per year over five years and a 15% chance of losing -2% per year. It seems like a pretty decent bet.

Here’s the trick though. There is no way to reliably tell which will be the good days and which will be the bad. There are plenty of articles on the internet that would tell you, “if you missed the best X days in the stock market, you’d be worse off by X”. And generally, that’s true. An article you’ll see much less is that if you were able to avoid the same X amount of the worst days, you’d be even better off. But again, there is no way to tell which days will be which and when.

If you find the guy or gal that can predict the ups and downs of the market, we need to all invest our money with him or her.

Oh, and did you notice, in 15-year periods or more, the S&P 500 has had a positive gain 100% of the time!?

The bottom line is you must be in it to win it. Market volatility is simply part of the process; to the upside (which we all enjoy), and to the downside (which is sometimes painful).

Which brings me to,

There are a lot of bargains in the stock market today. The precipitous decline in stock prices has spared no company. Often, universe-delivered calamities punish the stocks of strong companies unfairly. And that’s what we have today.

The last time this happened was during the financial crisis, and before that stocks of good companies were down in the wake of the events after 9/11. These chances seem to come once a decade. I don’t mean to be insensitive to those who are negatively affected by natural (or man-made) disasters. It is simply the reality of how markets work; when there is a lot of fear, there is a lot of opportunity.

I implore you, if you are hoarding cash you do not need for short-term events, consider funding your account. Decisions we make today, if made wisely, could mean outsized returns for the next decade or more (or until the next calamity).

I’ll leave you a few words from Warren Buffett. He wrote in an Op-Ed, in the New York Time is 2008 during the financial crisis, the following (link: https://www.nytimes.com/2008/10/17/opinion/17buffett.html):

“A simple rule dictates my buying: Be fearful when others are greedy and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”

Here are some other interesting links:

“COVID-19: It’s Not About Europe, It’s About Incompetence”: https://www.forbes.com/sites/stephaniesarkis/2020/03/12/covid-19-its-not-about-europe-its-about-incompetence/#5e07a23a122e

 “To Improve the US Coronavirus Response, Donald Trump Should Resign”: https://www.theverge.com/2020/3/12/21176170/coronavirus-response-donald-trump-resign-crisis-pandemic-response

“Clowns in the Time of Coronavirus”: https://www.rollingstone.com/politics/political-commentary/trump-coronavirus-response-fail-959868/

“The Best Indoor Games for Quarantined Kids and Families”: The 5 Siiiiiiickest Games for Quarantined Families
Thanks, and have a great weekend.

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Ben