18 Mar 2020

Negative news abounds; but things will get better

Castlepoint Funds Management director Richard Stubbs puts some investment perspective around Covid 19.

In the 20th century, the United States endured two World Wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497." – Warren Buffett

Close your eyes and imagine this. In six months' time a virus vaccine is announced and starts becoming available. By that time Reserve Banks have cut interest rates and governments have announced fiscal stimulus via business support packages, tax cuts and infrastructure spend.

Unfortunately, our crystal ball is cloudy, and we cannot say with complete certainty that that scenario will happen, but it is a scenario that is more likely than endless disruption and turmoil.

There is currently an arms race by biotech firms on COVID-19 vaccine research. It is not if, but when a vaccine with arrive. 

Fiscal stimulus talk was becoming more prevalent before COVID-19.  Trump wants it.  Our Reserve Bank Governor Adrian Orr wants it. 

Quite frankly, why wouldn’t you borrow money at close to zero interest rate that you don’t need to pay back for 20+ years and build all those roads, bridges and tunnels that we need.

It is a known psychological bias that our opinions are anchored by near-term events. They can even be anchored by completely irrelevant and meaningless facts. 

James Montier of GMO once asked on a behavioural finance questionnaire for people to write down the last four digits of their telephone numbers. Then say whether the number of doctors in their capital city was higher or lower than the last four digits of their telephone number. 

He then asked people for their best guess as to the number of doctors in their capital city. Those with the last four digits greater than 7000 on average reported 6762 doctors, whilst those with telephone numbers below 2000 arrived at an average 2270 doctors!

This is not a cheap party trick, there is academic research on this, which Montier has also noted.  ‘In a 2001 research paper, Englich and Mussweiler took criminal trial judges with an average of more than 15 years of experience as subjects. The judges heard the cases at the end of which the prosecutor asked for either a 36-month sentence, or a 12-month sentence for exactly the same case.

Those prosecutors who asked for a 36-month sentence extracted a jail time that was 8 months longer than those who sought a 12-month sentence. Intriguingly, these findings were independent of whether a true prosecutor or a student played the role of the prosecutor.

Currently all the news is negative.  Virus cases are increasing, and countries are shutting down to slow the progress of COVID-19. There will be an economic impact and some companies may fail, but it is not the end of the world.

We cannot predict the future, but we can observe that given the massive amount of negative media, forecasts are likely to be negatively biased.  We can also observe that times like these induce irrational panic selling.

It is times like these that fantastic investment opportunities arise. Good companies can be bought at bargain prices. And while some companies may fail, the vast majority will survive and prosper.

News around COVID-19 is undoubtedly going to get worse before it gets better, but it will get better.