In 1697, the Dutch explorer, Willem de Vlamingh became the first recorded European to see black swans when he travelled to Western Australia where they were common. Until then, Europeans had presumed that all swans were white because all records of the bird referred to their white feathers. It was a known fact. Until it wasn’t.
The theory of Black Swans was reviewed in Nassim Taleb’s famous book: The Black Swan: The Impact of the Highly Improbable.
Taleb refers to experiences and ideas thought impossible which subsequently came to be. He mentions the creation of the internet, the terror attacks on 9/11 and later, the global banking crisis when the world’s entire financial system came close to total collapse.
It’s hard to say if the current Coronavirus pandemic is a Black Swan. It’s certainly not the first pandemic the world has experienced (SARs, MERS, Ebola and Swine Flu have all taken their toll on the world’s health in the 21st century) and nor is it the most virulent (HIV/AIDS has killed over 25milion people to date).
However, the speed of the infection rate, its resistance to known vaccines and the suspension of many aspects of modern life have created a sense of disquiet not experienced since World War 2. Boris Johnson said recently that ‘Coronavirus is the biggest healthcare challenge in a generation’. The general public seems to have lost its collective mind, grappling over supplies of hand sanitiser, pasta and toilet rolls.
The investment markets have reacted negatively. The one thing investors don’t like is uncertainty. There is more uncertainty than we’ve experienced in a long time.
There has been a sell-off across the stock market and almost no company has been spared. Businesses like Apple, BMW, Amazon, Waitrose, Rolls Royce and others have seen their value fall by up to 30%. It was only on February 12th this year that the stock market hit an all-time high and experts were predicting another positive year of healthy returns.
Why have valuations fallen so far and so fast? How can the value of a world-class business be worth 20% or 30% less today than it was just before Valentine’s Day? It comes down to one thing – earnings. The market’s expectations of future earnings that these companies will make through selling goods and services. The virus could lead to job losses, and wage freezes and people will stop buying computers, cars, holidays and many other non-essential products.
In the short term that’s almost certainly true and we can expect to go into a period where the economy stops growing as we work our way through the challenges. At some point things will change, the economy will bounce back, and stock prices will rise – they always do.
“All market declines are temporary and eventually give way to the resumption of the permanent advance.” Nick Murray
The chart below confirms that using history as our guide, the negative sentiment experienced during emergencies tends to be fairly short-lived. Markets bounce back after six months in most cases. I have no idea, and neither does anyone else whether it will be three months, six months, 12 months or something else, but things will change, and a recovery will get underway.
The worst thing you can do is to attempt to time the markets. To sell real assets now while they are at a temporarily lower value than they were six weeks ago and make a paper loss a real loss. And then to try to re-enter the market before the inevitable growth phase gets underway.
All the odds and weight of history is against investors attempting this. Unless they are supremely lucky, they will end up losing out and experiencing a lower overall investment return than those who had the courage to sit tight.
After all, if a Black Swan does come along, you don’t want to be a sitting duck.
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Stay safe and stay well.