Age of Unreason

“We don’t have to be smarter than the rest. We have to be more disciplined
than the rest”
- Warren Buffett, Investor

“The greatest edges an investor can have are a long term orientation,
and to resist crowd psychology”
- Seth Klarman, Investor

“If SkyNews24 had existed during World War 2 we would have
surrendered in 1940”
- Rory Sutherland (author of Alchemy)

“I often urge investors to avoid one-dimensional thinking. People always ask me if the president or the FED will harm the market. I explain that the market is far more complicated than one variable. But in this case it really is about one variable. As soon as there’s clear evidence that we’re winning the war against this virus then financial markets will respond”
- Eddy Elfenbein, Investor

“If everybody else jumps in Bo’ness Docks it doesn’t mean that you have to”
- Grannie McKay

Jings, where do I start? It’s hard to believe that only a week ago my wife and I were coming to the end of a fabulous week’s holiday in the north of Tenerife. Everything was normal. Well, better than normal to be honest. We’d had the best week’s weather we’d ever enjoyed in Puerto de la Cruz which is “famous” for clouding over around lunchtime, and/or its rainfall which accounts for the lush greenery in the area. Every cloud and that….

Our hotel, the Botanico was quieter than expected, perhaps only a quarter full, thanks to it attracting an older clientele, many of whom had cancelled in fear of catching the coronavirus while travelling. That apart you wouldn’t have suspected a shock was on the cards when on last Saturday morning, the day we were meant to travel, the Spanish government because of “virus” problems in Madrid, without warning shut down the whole of the Spanish territories, including the Canary and the Balearic Islands.

And instead of allowing empty planes to arrive and remove thousands of tourists, they made us stay crammed in the airport for many hours spread over two days, thus increasing the chances of catching the virus from others. Some strategy eh? So as a consequence, since we returned last Sunday we’ve been self-isolating at home, in Bo’ness, me largely in the music room (Ibiza room) and Fran in the TV room, which luckily enjoys stunning views over the Firth of Forth.  It all looks so serene that it’s hard to comprehend the utter panic we all find ourselves in with disappearing toilet rolls and pasta (anybody for Spaghetti Bogrollnese?) tinned foods, fridge freezers and with stockmarkets throwing a wobbly. 

I was asked yesterday by a financial editor if there was anything I could say to cheer her up. I had to admit that what’s happening now is a genuine black swan when something hits you out of leftfield that no economic research predicted, even the world class reporting we’ve received from Ned Davis Research for nigh on twenty years.

The disappearing toilet rolls, the crowds fighting with each other in supermarkets and the erratic nature of world stockmarkets points to levels of fear I haven’t witnessed before in my 51 years since attempting (and failing) to become an actuary. Mind you there wasn’t much demand for an optimistic actuary. Still isn’t. Same goes it seems for economists, epidemiologists and biomedical data scientists. There are for example folks in these fields who do have different views to their pessimistic “colleagues” but sadly they don’t get any coverage on TV News programs which increasingly compete for your attention with the direst spin they can adopt. But then you’ve heard me go on about this for years. Though my view on this annoys others it seems. I was called a flat-earther by someone last night on Twitter merely because I mentioned there were medical experts who were of the view that flawed data regarding coronavirus cases and deaths were leading governments down a dangerous path. 

Here’s what Stanford University’s John Ioannidis, Professor of medicine, biomedical science, statistics, epidemiology and population health has to say… “The response to the coronavirus pandemic may be a fiasco in the making because we are making seismic decisions based on utterly unreliable data.” And went on to call the response “once-in-a-century evidence fiasco” and compared it to “an elephant being attacked by a house cat. Frustrated and trying to avoid the cat the elephant accidentally falls over a cliff and dies”.

His views are supported by Italian medical researchers sampling the deaths in Italy where they found that 99.2% of the fatalities were people who suffered from previous medical conditions, 25.1% with one condition, 25.6% with two, and 48.5% with three or more.  Also I’m told that in Scotland a retired epidemiologist is of the view too that flawed statistical modelling is exacerbating the economic damage and the fear levels of consumers and investors.

Actually I can recall one period in my career that felt like today, the last few weeks of 1974. From the summer of 1973 the UK and US stockmarkets had fallen steadily, then hit the bleakness of November/December ’74. By early January ’75 the UK stockmarket had fallen 72%. Then suddenly in the middle of the darkness it shot up over the following 12 months by around 125%, and kept going up. But I had no savings then. Different when you watch life savings getting a kicking, eh?

Since 1926 there have been 11 bear markets (stockmarkets falling) and 12 bull markets (stockmarkets rising). The average bear market lasts 1.3 years, the average bull market lasts almost 7 years. In the US the bull market beginning in January 1975 lasted over 12 years and returned to investors over 760%. I remember Amazon’s share price falling 95% after the dotcom bust of 2000. Eddy Elfenbein today reminds us of stockmarket falls in reaction to Pearl Harbour, and the fast recovery that followed when there was only a light at the end of the tunnel.

My colleagues have been speaking with most of the fund managers we selected for our “fantasy football team” on the basis of their processes and qualities whether goalkeepers, defenders or strikers. Experienced investment advisers like Jim O’Shaughnessy preach that process and discipline are all-important when investing for the long haul. And not to deviate from your considered process when markets take an indiscriminate thumping.

The message coming loud and clear across the board is that their processes have not changed. By concentrating on quality companies with strong balance sheets, (or fixed interest) most have fallen much less than the general market, and they believe when this virus is seen to be under control, the relief will push values higher on what they call a V-shaped recovery. We don’t know when that will be, but it wouldn’t surprise me if it happened sooner than pessimists think.

Last word goes to legendary US fund manager Bill Miller, a man with quite a record of success over many years. This is what he said on Wednesday “I think this is an exceptional buying opportunity. There have been four great buying opportunities in my adult lifetime. The first was in 1974, the second in 1982, the third was in 1987, and the fourth was in 2008/9. This is the fifth one”

Meanwhile back to the music. Is it five o’clock yet anywhere?