Just over a month ago, I wrote an article titled 'Investing lessons from a health crisis'. I mentioned that I didn't think that'd be the end of the series — that more would likely come up, in time.
And here we are.
The ASX is up 14% since then, but I don't think anyone believes there's no more volatility ahead.
The good news is that the curve does seem to be flattening. Government support — though slow — is coming. There is, if you squint, light at the end of this particular tunnel.
With that preamble, though, there are some things that investors can learn from the current circumstances — and some things that the general public would benefit from learning from investors.
Here are three observations:
1. Never forget the counterfactual
'Counterfactual' is a fancy word that simply means 'what would have happened, otherwise'. Think about the Y2K bug. Many, these days, think "What a beat up. Nothing happened!"
The latter is (largely) true. What we don't know — and, by definition, can never know — is what would have happened if techies the world over hadn't reprogrammed computers in the lead-up to the year 2000. We can't know the counterfactual, but it's important to remember there is/was one.
The 'cash splash' of 2009 was decried from most quarters as untargeted, wasteful and unnecessary. Which is easy to say now — but we don't know for sure what would have happened if we'd done nothing. Ditto the wage subsidies and other handouts this time.
It's important to remember that when it comes to reviewing the actions of governments and regulators over the past few months. We'll never know how much worse — or better — things might have been had governments acted differently.
2. Probabilities are all there is
In the aftermath of a crisis, we all tend to look to place blame. At the moment, the WHO seems to be the target du jour. Maybe even reasonably. Did they wait too long? Did they downplay the threat? In hindsight the answer seems an obvious 'Yes'. But in not rushing to conclusions over SARS, MERS, Swine Flu etc, unnecessary panic and detrimental policies were averted.
My intent is not to defend WHO — I haven't looked deeply enough into the data to have a view — but we also need to be careful, as a society, that we don't incentivise ourselves to always assume a worst-case scenario. Public policy — just like life — always requires the assessment of risk: the likelihood of an event, and the size of the damage. But not just the damage done should the risk come to pass. Policy also needs to consider the damage done in either not reacting or overreacting.
After all, if you thought of all the things that could go wrong today, you'd never leave the house. And considering all of the worst-case scenarios around the house, you'd never get out of bed, either.
Risk versus reward. Cost versus benefit.
It's a fraught and thankless process.
We want answers. We want to assign blame. We want things to be black and white.
Which is fine, but life is, and will always be, grey.
3. Costs and benefits are indirect, too
A curious combination of high profile people from across the political spectrum and areas of expertise got together last week, to call on governments to start winding back restrictions.
I have no interest in second-guessing our health officials when it comes to the rights and wrongs of whether 'now' is the right time. I'm no epidemiologist and neither are 99.9% of our members and readers (or 99.99% of those on social media!).
But the thinking behind that call is worth keeping in mind. Investors call it second-order thinking, and it's a very, very useful tool.
See, at the first order (and very simplistically), the shutdowns are framed as 'lives versus the economy'. That's instinctively sensible. It's also enormously simplistic and emotive. And it's not very useful.
Let's think about the second order impacts of the shutdown. In the positive column, air and water pollution seem meaningfully improved. Many people are finding new ways to work and — by all reports — previously sedentary people are rediscovering walking and riding bikes for exercise. We're spending more quality time with our families. The 'cons' list includes the economic, mental and emotional impact of unemployment, the increased risk (and, in all likelihood, perpetration) of domestic violence, and the psychological impacts of isolation on kids and adults alike.
There are plenty more that we could put in each column. Indeed, I saw one early report that the number of lives saved due to the decrease in pollution might be as high as 75,000 in China alone.
No, I'm not going to draw a conclusion, nor come down on one side or the other. I have no interest in arguing with people who have already made up their minds, and who wouldn't be moved, either way, no matter how strong the evidence.
My point is just that these issues are complex, and — like investing — we should resist the urge to draw knee jerk conclusions, especially when we can only see some of the data, and haven't thought through all of the many and varied consequences.
So to investing…
Yes, I'm a public policy nerd. Many of those observations above are, in the first instance, ways to build a better society, in my view.
Wouldn't it be nice to have a country full of people who understood and cared about nuance? About unexpected consequences, least-worst options, and best endeavours. Who wanted our society to learn and improve, rather than just find fault and blame?
It'd probably kill Twitter's business model, but couldn't we do with a little less arrogance, snark and 'call out culture'?
But I'll put that pipe dream to the side for a minute, and turn back to investing.
See each of the topics raised, above, will — if you let them — help you become a better investor, too.
So many investors ignore the counterfactual, both before and after making an investment. They leave so little room for error and chance, that they become a diehard fan of a company, rather than a dispassionate part-owner.
Then, if the investment works out, they tell themselves it was always obvious. And if it doesn't? They'll find someone or something to blame; rarely themselves, and often learning either the wrong lessons or no lessons at all, ignoring the fact that, if a couple of circumstances had worked out differently, so the entire investment might have turned out differently, too.
Ditto probabilities.
Investment isn't the avoidance of risk. It's not even the minimisation of risk. It's making sure you're being adequately compensated for the level of risk you're taking. That's true for any investment in any asset at any price.
It's also why we diversify. Every single one of our recommendations comes with a 'Risks' section. That, implicitly, tells us we should expect some of those risks to come to pass for at least some of the companies we recommend.
And the lessons learned? Here's the thing: you want to be very careful. Learn no lessons, and you won't improve. But learn the wrong lessons, and you run the risk of doing worse — not better.
For example, the process that saw Warren Buffett make a fortune also saw him lose 100% of his investment in one company he bought that went broke. I'm sure he looked at it and found either errors or circumstances to avoid next time. But there's also part of his process in selecting that company that also went into his purchase of many other investments that have made him — and his shareholders — a fortune.
More recently, he lost money on IBM, but that didn't stop him making an enormous investment in Apple.
Second order thinking matters, too. On the basis that nothing is more certain than 'death and taxes', plenty of people paid up for the ultimate defensive company: funeral director, Invocare. And then it turned out that while death and taxes were inevitable, well-attended funerals were preferable, but not inevitable, as governments banned large gatherings.
First order thinking says 'people will always die' (however unfortunately). Second order thinking knows that there are other considerations.
Another great example is Apple's own success. While people have (reasonably) focussed on the handset replacement cycle, Apple has parlayed its brand strength into an enormously successful and growing 'services' business — the App Store and various subscriptions it offers to Apple customers. Those second-order thinkers who saw it coming were amply rewarded.
Foolish takeaway
To my continued chagrin, I still don't own Apple shares. Just because I can see the examples in hindsight doesn't mean I'm always smart enough to grab every single one of them in advance (unfortunately)!
I'm pleased to say that Apple is a very successful three-time recommendation for members of Motley Fool Share Advisor. So, by the way, is Berkshire Hathaway (I own shares of that one, at least!).
Both our ASX and US recommendations are, on average, soundly beating the market average.
We've also made mistakes, of course. We have our share of losers. We're not perfect. Which, I hope, you appreciate. If we only had winners, you should expect something fishy.
We spend a lot of time, right across The Motley Fool, analysing businesses. And we spent a lot of time trying to understand and correct our own biases and incorrect thinking, too.
The good news is that such an approach is additive — meaning the longer you do it, the more knowledge you accumulate (as long as you make the effort).
That meant we were prepared for the current downturn — not because we predicted it, but because we know these things happen, even if for unexpected reasons. We had the right intellectual framework, and the right temperamental approach, to not throw the baby out with the bathwater.
It's why, 14% ago, we were suggesting that our readers and members should continue adding money to the market, even when self-appointed experts were heading for the hills.
I remember 1987. And the dot.com boom and crash. I remember the GFC, Grexit and Brexit too. Just as importantly, we've learned from those who remember even further back.
See, investment optimists aren't always right. But they're always right in the long run.
Once you can internalise that apparent contradiction, you're well on your way to investment success.
Fool on!
