What I Have Learnt During The Covid-19 Crisis

Now is a good time to start a diary

Now is a good time to start a diary. It doesn’t have to be long. But there’s a good chance you’ll tell your grandkids about these days. Also remember that it’s hard to un-remember what you know about the past when looking back on it, so it’s good to document your thoughts in real time before they’re distorted by the changes of what’s to come – whatever they may be.

The above quote is taken from this article. I like the idea about a diary because most of what we feel and think today are long forgotten in less than one year. If no notes are taken we tend to use the benefit of hindsight to study what were the optimal things to do during the current turmoil. But in the midst of a crisis we don’t have any hindsight, unfortunately, thus it makes sense to take some notes.

As most crisis and recessions in the past, this one too will pass – we don’t know when.  Whether it will be a 30% or 50% drawdown is of course impossible to know, only hindsight will provide the correct answer. Looking back at the stock market history, every drawdown was an opportunity, but in the midst of the drawdown it doesn’t look like an opportunity but more like the end of the world. If it’s any comfort, this is the way it has always been.

Stress:

Reasons for anxiety will never be lacking, whether born of prosperity or of wretchedness; life pushes on in a succession of engrossments. We shall always pray for leisure, but never enjoy it.

Seneca

It can be painful to see the value of the portfolio plummet, and stress tends to shorten the time horizon, just like on the savanna where wild animals run from dangers they can see, and worry no more after escape. However, as an investor we have to think beyond the immediate threat of losing money because under stress most of us make bad long-term decisions.

I came into this crisis with a clear plan of what to both buy and what to do. I always have a plan for a crisis – I was prepared. My very simple philosophy is to add to my existing holdings and mutual funds on substantial pullbacks – and perhaps add some new names based on my short watch-list. However, what I was not prepared for, was the enormous volatility and daily swings. Admittedly, this made me deviate from my original plan, and so far I have not invested the amounts I planned. The market has moved to much and too wild for my liking. I’m a slow decision maker. What Mike Tyson once said comes to mind: Everyone has a plan until you get punched in the face.

Social media is like poision:

Refrain from following the example of those whose craving is for attention….. If you shape your life according to nature, you will never be poor; if according to people’s opinions, you will never be rich.

 During the crisis I have two to three times per day logged into my Twitter and Facebook accounts. This is way too often and a huge mistake because of several reasons:

  1. Confirmation bias. For example, Twitter makes me consciously or subconsciously follow people I agree with, not people I disagree with.
  2. Most is just pure noise, no substance at all. Some people tweets 30-50 times per day, obviously no one has any interesting thoughts in so many tweets.
  3. Loss of perspective and long-term focus. Social media is always just for the moment with a lot of crazy opinions and theories.

My 89 year old father, who has all his senses intact, can’t understand all the fuzz about the coronavirus. It took me some time to understand why but the reason is obvious: he has no access to online news nor social media, and only reads the physical paper once a day. He has perspective. Reading Twitter all day long does not give any perspectives at all.

The news is toxic:

Another mistake is reading the online news several times per day:

  • The news is mostly misleading. There is no perspective. Focus is being misled to where they want you to focus.
  • The world is complex and things happen for a lot of different reasons. Rarely does the media give any insight into why and how. Cause and effect are complex.
  • It makes you panic. The papers are in the business to make money, and headlines grab your attention. It limits your thinking.
  • It’s generally a waste of time, most of the news is noise.
  • The news is a secondary source, often filtered by the biases the journalist may have. The primary source is always better.

I much prefer reading books, perhaps rereading books.

Tail-risk:

Nassim Nicholas Taleb has influenced my thinking and mentality tremendously. Tail risk is totally random and unpredictable and can’t be managed (he says the coronavirus is not a black swan, it was highly predicted). You can only prepare for it:

During 2019 I was looking into how to hedge my portfolio to lessen my exposure for tail-risk: I simply bought S&P 500 puts way out of money, at least 5% out of the money. The problem with this strategy is that it feels I’m bleeding slowly to death, and perhaps making a big gain after years of bleeding. In October 2019 I came across this article by Meb Faber, making me stop hedging. That was of course a shame, if I had kept doing it I would have offset a lot of my unrealized losses just months later.

Hedging for tail risk is of course very difficult because you are bleeding slowly, until you have the rare big gain. Think about this: If you make 500 000 in year one and nothing in the following nine, you will most likely be a lot unhappier compared to receiving 50 000 evenly in all ten years. Behavioral experiments suggest our happiness depends far more on the number of positive feelings than on the amount when they hit. This means any payment is much more important than the size of it. In order to have a pleasant life most people should thus spread these payments evenly. (Even worse is if you make 500 000 in year one and give back 400 000 over the next nine years. It most likely feels better to receive nothing because you have nine miserable years.)

Diversification

Diversification is a must for most investors. Warren Buffett and a few others can manage very well without diversification, but the fact is that most stocks do not manage to beat short-term treasury bills. This makes stock picking tremendously challenging.

I don’t consider myself to belong in the investment premier league, so I have chosen to diversify. Coming into the crisis I owned real estate in two countries (20%), a market neutral hedgefund (20%), gold (3%), cash (17%), stock mutual funds (20%) and stocks (20%). The mutual funds and stocks are diversified between sectors and countries. This strategy has worked well: gold is up for the year and my hedgefund is down 2%. This, together with the cash, has served as a nice cushion in troubled times, and some of the cash is now deployed. However, I always have cash to cover three years of living expenses. The gold is just in case I someday need to barter (!).

Fragility

A fragile company is of course more likely to be affected by tail risk. A fragile company needs to be handled with care, while an antifragile company can benefit by external shocks, like for example Amazon. I believe I have put to little emphasis on this on my stock picking.

Berkshire Hathaway is a good example of an antifragile company. Warren Buffett doesn’t claim to be an expert in all areas of expertise under the Berkshire umbrella: he manages in knowing ignorance, and the company usually thrives. And through his hands-off management, the company achieves a remarkable degree of antifragility. With minimal bureaucracy! I believe Berkshire at today’s level (170 USD) will return good returns over the next decade.

Living costs:

I have always aimed at a moderate and to a certain extent minimalistic living. I believe it’s very hard to adjust from high to low consumption. Today, when my tenants have problems paying the rent, this comes handy. I don’t need much to live a pretty happy life. Research shows that a high income very often leads to high consumption, thus making high earners just as financially poor as someone with a low income. I have a very irregular income, and have cut my expenses to prepare for a crisis.

Debt and ruin:

“Over the years, a number of very smart people have learned the hard way that a long string of impressive numbers multiplied by a single zero always equals zero. That is not an equation whose effects I would like to experience personally, and I would like even less to be responsible for imposing its penalties upon others.”

– Berkshire Hathaway letter 2005, page 20.

First rule in investing is survival. You need to overcome the bad times, if not, then you will end up with zero. Avoid excessive debt. You never know when the credit markets freeze (like they more or less have now). Likewise, avoid companies with stretched balance sheets. Unfortunately, I have a couple of them in my portfolio.

It could be worse – make sure you have  perspective:

The grandparents of my former girlfriend lost their pension and income when the Soviet Union collapsed. They were about to retire, but found themselves at 65 years old with no pension and savings when the currency went belly up. It all blew up in smoke in just a few days. They spent the rest of their “retirement” working every day – milking the cow, growing vegetables etc. Later they considered themselves lucky – those who couldn’t be self sufficient suffered a lot more.

Nature has not changed

I go to the beach every day. Absolutely nothing has changed for many generations. The world goes on.

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