Don’t Let the Perfect be the Enemy of the Good – February 2020

Ballerina posing as the Black Swan in Swan Lake
“The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight.”

This aphorism is attributed to Voltaire however I wasn’t around in the 1700’s so I can’t tell you for sure that he wrote it.

There are many iterations of the saying in philosophy, commerce and investing. For example, “the best is the enemy of the good”.

The first time I heard it was during a pension committee meeting with an institutional client. I’ll explain the context later.

What made me think of this quote recently is the reaction in the markets to the coronavirus.

No one has perfect information.  We don’t know with any certainty how long and extensive the impact of the coronavirus will be. 

Is it a “black swan” event?

There are theories that the coronavirus will cause a global slowdown. Fear created by the media and the markets are reacting. Overreacting.

On an off note, I don’t understand why people are wearing masks. 

Masks are not a filter for incoming virus or flu particles. Masks don’t protect you from contagion.

Masks are meant to be worn by people who are sick. When worn by a sick person a mask prevents viruses from spreading.

I suppose if you think you are sick it is a good idea to wear a mask but when I see people wearing masks I think they are already sick and should be at home.

The CDC agrees, writing on its website: “CDC does not recommend that people who are well wear a facemask to protect themselves from respiratory diseases.”
https://www.washingtonpost.com/health/2020/02/26/how-to-prepare-for-coronavirus/?arc404=true&itid=lk_inline_manual_12

I digress. 

Both the stock market and the bond market have experienced sharp swings in price. Stock prices are down, and bond prices are up. 

I remembered the 2018 flu season as particularly awful, so out of curiosity I decided to do some fact checking.

According to the CDC from October 2017 to February 2018 the US experienced  a devastating flu season . Approximately 80,000 people died of the flu.
 
“The 2017-2018 flu season was severe for all populations and resulted in an estimated 959,000 hospitalizations and 79,400 deaths. This is the highest number of patient claims since the 2009 flu season.” 
https://www.cdc.gov/flu/about/season/flu-season.htm

Globally, as of February 27th, there are 83,105 reported cases of coronavirus. Less than 10% the number of reported flu cases in the US for 2018.

Deaths from coronavirus are about 3.5% of the number of deaths from the US flu epidemic.

I’m not diminishing the seriousness of this disease and I hope it doesn’t spread. 

But when  the markets are in “turmoil”, this is the time to take advantage of an equity sale. 

The “contagion” in the markets has not spread to every sector or every company so 
good investors, not perfect investors, start looking for bargains.

Back to the pension committee.

It took me awhile to understand why my colleague was using this quote. 

Pension committees are faced with unique challenges. For Defined Benefit programs they try to “match” their assets with their liabilities. The reality for an asset liability investment strategy, is that there is no perfect match.

The underlying message is that perfection is not possible when making investment decisions. It doesn’t matter if you are an individual investor or an institutional investor.

Attempting to have everything lined up perfectly, or to wait for perfect information often prevents you from doing anything at all.

When is the right (perfect) time to invest? If you try to pick the perfect day it is likely that day will pass you by.

The right time to invest is as soon as you have a brokerage account open and funded.

Invest in something. It doesn’t have to be perfect. 

I’m going to look for companies that produce face masks and see what is happening in that sector.