Fear and Greed
The markets are all the talk of the town this week in this and every town. It is not about a a bunch of market participants going paranoid out of extreme forecasting anxiety. As I heard Rachel Maddow say this evening, the markets are merely acting as a window on the rather extreme impact that the Coronavirus (COVID-19) is starting to have on the world economy. Let’s take a quick survey.
We know that China has 80,000 cases and is largely on lockdown in its main industrial region radiating out of Wuhan. Korea, a much smaller country has 2.300 cases and is at the same no-fly level issued by CDC as China. That means the impact in South Korea is 4X that of China in terms of population impacted (or perhaps under-reporting by the Chinese?). Japan, Italy and Iran are next on the hit parade with growing concern about the levels of infection. Travel to those places are being discouraged by CDC. Not too many Americans are going to miss not going to Iran, but between the business links with Japan and the the vacation planning involved with travel to Italy, its starting to come into focus that this thing is going to affect us all. The impact is going to be felt in both lifestyle, with the need to reduce travel (Amazon has gone so far as to restrict employee travel within the U.S.) and the general constriction of the economy.
Boris Johnson is looking brilliant today as the EU borderless approach to life in Europe is already under attack as Italy looks to be an important and central outlier of both heavy exposure to infection and even heavier testing at the borders. Naturally, the area most affected is Lombardy, where Milan is located and therefore the center of the country’s economy. I was there just four months ago. I just booked my daughter and her family to spend a few days in Italy (further south in Tuscany) at the end of our family gathering in July in Krakow, Poland. My daughter does not handle risk with calm and ease. I have told her to stay calm and carry on, but that will only last as long as this thing recedes with the warming weather. I am going to London in two weeks, to Krakow and Transylvania in July and on a motorcycle trip through the Pyrenees of Spain and Portugal in August/September. We’ll see how all of that work outs, but I remain hopeful.
I spoke to my good friend Tom (an old high school buddy from Rome). He just returned home to Santa Fe today after two months of touring Australia, New Zealand and taking a South Seas cruise. He says it feels good to be home and was glad he didn’t get stuck on his ship like some cruise travelers in the Far East.
It might just be my age group or the fact that I’ve taken four cruises in as many years, but it seems to me that the cruise industry has been investing huge money on new ships and that has to be concerning to them. Frankfurt airport has just announced lay-offs and cost cuts due to dramatically reduced air travel. Frankfurt is an important European hub. But Frankfurt is not in China, Korea, Iran, Japan or even Italy. Frankfurt should concern us all because it is the canary in the coal mine of foreign travel crisis that is a direct result of the Coronavirus.
I heard today that one of my company’s employees in Scotland, a South Korean with a family that he moved there two months ago, has been quarantined by local public health officials who were concerned that their young son had a cold after a return trip to South Korea. We do not suspect Coronavirus, but we will know for sure by Sunday. In the meantime, a key employee cannot be in the lab to do his important job (he is a specialized ceramics engineer specializing in extrusion). Without him there, our ability to extrude cathodes to test as we try to move forward on our TRL 5 testing program plan is compromised.
This week the market traded off for its seventh day, falling more than 3,500 points on the Dow, or off 10% from their recent highs. In the hedge fund world, a 10% drawdown is huge. The case I am working on right now has a 4% monthly drawdown limit. So this is big and everyone is taking notice (or if you’re like me, I try to just look away and not look at my investment portfolio).
I was recently talking with the new Dean of the business school I will start teaching at this Fall. We were talking about my helping to craft an ethics course for the school. I was waxing eloquently at lunch about the Wall Street tendency to alternate between greed and fear and how quickly things can shift back and forth between both of those emotionally-driven reactions to the market. He thought that Fear and Greed was a great name for my ethics course and I agreed. It is, after all, what drives people as investors more than it probably should. I think my years of working in the investment management space and my somewhat jaundiced thoughts about managers’ ability to deliver consistent good performance on an active basis (the basis of my recent story advocating for passive management), is what gives rise to a view that we should try hard to be dispassionate about investing and not be driven by the extreme emotions of greed and fear.
This Coronavirus market we are now seeing has brought the issue of Fear and Greed right back to me. The fear is easy to grasp. Everyone my age is swing their retirement nest eggs get hammered Juster when they most want that not to happen. I got afraid a year ago and scaled back my market exposure and look what I missed…some of that 30% gain last year. But I also suffered less of this most recent 10% loss as well. The missing out (a.k.a. Greed) doesn’t bother me in the least.
I have always been a believer in being an “earned income” guy rather than a “capital gains” guy. Obviously that is both consistent with my career and inconsistent with my more recent work as a venture capitalist. However, I have tended more toward being a business builder than an investor. I realized that is what makes me happy more than just making a killing on an investment play. I guess I have seen too much fear and greed to be a good investor, but it doesn’t stop me from working on building businesses or advising others on businesses or teaching others about businesses. But fear and greed no longer interest me.