Fear and Everything

The is the first edition of the hopefully quarterly memo from The Longterm.

As 2020 came to an end, gatherings of close friends and family were either hampered by the COVID-19 pandemic or nonexistent.1Did you notice that during the holiday season, rather than simply wishing friends and family a happy new year, it became common in these interactions to specifically contemplate how 2021 has to be a better year? At that time, although it had been 10 months, I felt I could make the best of it for the remainder of the pandemic. But as March 2021 continues on, and we pass the one year mark, the pandemic is feeling as endless as ever.

Sadly, as much as we all tried to wish it into existence during the holidays, 2021 doesn’t have to be a better year. That doesn’t appear to be the way the universe works; things don’t immediately revert to the mean on our schedule. In my case, this was made abundantly clear when a close family member had a major medical issue just before the calendar turned to the new year.

This brought new perspective to some of the same topics I’ve found myself coming back to again and again during the pandemic.

💀 Fragility2[ frə-jĭl′ĭ-tē ] n. The condition or quality of being fragile or easily broken; hence, weakness in general; liability to be destroyed or to fail; frailness.

The delicate nature of human life has been reinforced via the novel coronavirus. In general it is mind-blowing that something we cannot even see, such as a virus, can be so powerful.3The pandemic has also highlighted the fragility of not only human life but also human-created concepts like supply chains, companies, money, relationships and, yes, markets which I will discuss later. That’s not something the average person thought much about pre-2020.

The first epidemic I ever did a deep dive on was a bacteria-based outbreak in London during 1854. This incident came to be known as the Broad Street cholera outbreak.4I’ve been interested in this concept of the ultimate David (e.g., a micro organism or virus) versus Goliath (i.e., sapiens — the most advanced living creatures) since learning about this particular example in an undergraduate micro-biology class. I’ve mentioned this undergrad class, and this particular case study, to numerous friends over the last decade. For whatever reason, I found it fascinating at the time. It is now more relevant than ever.

At that time in Europe there was a hypothesis — miasma theory — that diseases like cholera were being spread through the air. That turned out to not be accurate. However, this bad science impacted the actions and precautious taken during this particular outbreak.

On Broad Street, a turning point occurred when community members charted the cases of those falling ill with cholera. Ultimately they were able to trace the source of the bacteria to a water pump.

Now, looking back, we collectively acted in a very similar manner during the pandemic of 2020 as did the inhabitants of Broad Street in 1854.

Essentially the opposite scenario played out in 2020. At first we were as worried (or more worried) about contaminated surface as we were about airborne transmission. This incorrect information, as it did on Broad Street, impacted the precautions we took.

Science has come a long way since 1854. People are still people, though, with biases and anxieties. Even modern science has not quite found an antidote to keep those feelings from surfacing irrationally.

Speaking of anxiety, one of the common drivers…

⚖️ Risk5[ risk ] n. exposure to the chance of injury or loss; a hazard or dangerous chance.

Risk/reward decisions took on new meaning last year. It felt like we were making these decisions much more frequently — whether it was while doing what used to be simple tasks like grocery shopping or attempting to plan what we used to consider a normal life such as a weekend getaway with friends.

We may look back at some of things we did as overkill,6Or even some as downright silly… Did anyone else end up disinfecting a disinfecting wipes container? but it gave us piece of mind in the moment. While this type of new risk/reward assessment eventually bled into all aspects of our lives, but this first manifested itself in the stock market…

Investing During a Global Pandemic — One Year In

In February of 2020, I had over 75% of my net worth in cash. As it turns out, that was a lucky thing.7As many of you are aware, I previously used a different forum to wrote about my delving back into the public markets throughout the pandemic. The one year mark of the pandemic just passed on March 11th, which made me want to relive the chaos of March 2020.

The S&P 500 chart below overlays a few major events associated with the pandemic along with my investing activity from the first days of March through the end of May 2020.8To be clear, the purchases/buys listed on the chart were not only of SPY. They reflect various ETFs and individual stocks. SPY demonstrates the broader market sentiment at the time.

After the ~8% drop on March 9th and ~10% on March 12th, when a ~12% single day drop occurred on Monday, March 16th — which is notably the largest percentage drop ever for the Nasdaq9And the third largest percentage decline ever in the S&P 500 after 1987 and 1929… — there was no way to know that the bottom would come soon after on March 23rd.

Looking back at a decade of investing, it was unprecedented just how swiftly the market was moving. With that said, it’s hard to say this was driven by irrationality. People were fearful in this moment, and investors were no exception.

Behavioral economist George Loewenstein put it this way; “Fear causes us to slam on the brakes instead of steering into the skid, immobilizes us when we have greatest need for strength.”10Loewenstein GF, Weber EU, Hsee CK, et al. Risk as feelings. Psychological Bulletin 2001

While it is smart to be prepared, it’s all about right-sizing the risk we are facing. It turns out this is very difficult to get through our monkey brains, though.

Although our minds are capable of rational deliberation, our thinking reverts back to the intuitive reactions that helped our ancestors survive in a cave.11Kahneman, D. (2011). Thinking, fast and slow That’s why, in times like these, we embrace an overabundance of precautions. These risk-off actions, such as selling a stock, ease the anxiety brought on from the fear.

In the cult classic Donnie Darko, Donnie and his teacher have an interaction regarding the emotions of fear and love that goes something like this:

Kitty Farmer: Fear and love are the deepest of human emotions.

Donnie Darko: Okay. But you’re not listening to me. There are other things that need to be taken into account here, like the whole spectrum of human emotion. You can’t just lump everything into these two categories and then just deny everything else.

While Donnie is right that we cannot distill actions down to only one emotion — fear is extremely powerful and may even be a driving force behind human evolution making it rather foundational to us as a species. This is why the fictionalized motivational speaker / self-help guru in the movie, as well as those in real life, use an emotion like fear as a lynchpin in their communications.

The market is one of the more pure play places to see the tangible impact of fear.12There’s even a “fear gauge” that Wall Street uses called the VIX… Lowenstein’s idea of “steering into the skid” when we become fearful; it resonates as a long-term investor. It’s essentially the old adage of being greedy when others are fearful. To meme-ify it13If there is not a company named Memeify, there will be… — this is the strong hands versus weak hands meme of 2020.

Fear might be the ultimate double-edged sword. It is so very necessary but so often downright unpleasant and even physically harmful. Donnie was right. It’s not just fear and love. It’s fear and everything else.