Coronavirus and The Dow
Possibility vs Probability
This past week, the Dow suffered its worst single digit fell in history. At this point, its not really a surprising news anymore even if you work as a freelance painter in Ohio. Every single media outlet has been publishing multiple stories about the coronavirus (COVID-19) and how its affecting the global economy. Things got even worse when I scroll through Twitter and witness various doomsday themed tweets from people stocking up six months worth of food to conspiracy theorist stating that this virus is necessary because the earth is overpopulated. Fascinating!
The hilarious part is — these doomsday themed tweets are usually followed by arguments on why one should buy safe haven assets, how the global macro economy is overextended, and that the equity market needs a correction; as I only use my Twitter to follow public figures and notable individuals in the asset management industry.
Seriously???
If this doomsday scenario that you’re theorizing really happen, I’m fully certain you won’t be thinking about the stock market…
Possible Yet Improbable
Jim O’Shaughnessy once wrote a great article explaining that successful active investors think in terms of probabilities, not possibilities. Simply put, when a scenario is possible but not probable, people tend to overestimate the likelihood of its occurrence.
Sounds familiar?
I can’t help but think that this mindset is extremely applicable to the current situation surrounding the coronavirus. As a human being, we naturally seek for certainty and answers in our life. Personally, I despise being in an uncertain situation and much prefer knowing for sure that something bad is going to happen. Nothing in life is 100% certain, but focusing on possibilities will hinder us from logically analyzing the situation and might even put us in a paranoid mindset that is not beneficial at all.
Even if something is possible, it might be improbable.
Its possible that a person might get into a plane crash the next time he travels, so he’s just going to travel by car for the rest of his life. Little did he know that the probability of dying in a crash per mile traveled by car is much higher than by plane.
Personally, I can really relate to this mindset because I’ve subconsciously adopted it prior to reading Jim’s article or other similar studies. Understanding and assessing the probability of my next step is calming. “If I fail this mid-term, how probable is it that I’ll receive an A in the class?” Knowing the answer to that question allows me to strategize and arrange my plan of study accordingly. Even during extremely stressful situation such as — “If I fail this class and need another year to graduate, how likely is it going to impact my long-term career trajectory?”.
Asking ourselves these types of questions enable us to think with a rational mind in the most critical moment. Thinking that anything negative is possible, will prevent a person from taking any risks, and thinking that anything positive is possible, will turn a person delusional.
Blinded by the concept that anything is possible, a person will be stuck living inside a bottle instead of exploring various probable opportunities in life.
Reflexivity
Popularized by George Soros, the concept of reflexivity in financial market means — inaccurate expectations can change reality according to them. In sociology, this concept applies to every aspect in life, it simply is a self-reinforcing loop between the cause and effect. To some degree, I believe that the world is currently in a reflexivity. The COVID-19 outbreak is a serious issue and it needs to be addressed appropriately, so lets be cautious, but remind ourselves of this possibility vs probability mindset.
The latest stats published by the Chinese CCDC on February 17th stated that the death rate for infected individuals between the age of 10–39 is 0.2% — increasing exponentially for older people between the age of 60–80. Additionally, an infographic from news.com.au assessed that the coronavirus may be more contagious than the common cold but its mortality rate is significantly lower than SARS, MERS, or the Bird flu.
Stay calm and safe.
-Marco
P.S. Even amidst all the fear and uncertainty, capitalism still works.
Originally published at https://www.marcomanoppo.com on February 28, 2020.
