What caught my eye this week.
When I began investing in the early 2000s, the September 11th attacks still loomed large in investors’ minds.
Of course, that shadow extended everywhere then. The West was at war in Afghanistan and soon Iraq. Terrorist plots exploded or were foiled with numbing regularity. It all hogged the news like Covid or Brexit.
In investing circles there was seemingly an extra moral question, too.
Was it right to try to profit from the share price moves that resulted from this chaos?
I spoke to some investors who had lost friends in the attack on New York.
Others had been able to profit from the gyrations – although the slow, grinding bear market of those years hardly gave one FOMO.
Welcome to the Terrordome
When equities moved in response to this advance in the conflicts or that hideous attack on civilians, vocal investors were split.
One camp believed life – and investing – went on.
We live in a capitalist economy, and markets are vital to its functioning. Giving up on making a profit and improving our lot was what the terrorists wanted. If you didn’t scoop up a bargain due to moral squeamishness, someone else would.
The other camp basically reacted as many of us do when faced with sudden, horrible news: really, is that what you are thinking about right now?
For the little my pennies mattered to the world, I was in the first camp.
I didn’t wish for more ghastly opportunities that scared investors witless. But I stood ready to act if they did.
After all, who knows or cares now who bought or sold shares during the Cuban missile crisis or on the eve of World War 2?
This too shall pass.
I also find it hard to believe that the world would be a better place if markets went haywire and prices crashed towards zero every time something awful happens. Quite the opposite.
And it’s not like I was being torn away from important official business as these dramas unfolded. Making my little trades to support efficient markets maybe even felt like a small contribution from the Home Front.
Convenient thinking, no doubt.
Many did – and do – disagree.
Public Enemy No. 1
The Covid pandemic has been interesting to watch through this lens.
Firstly, you can definitely believe that terrorists want to stop life going on as normal – and that we all need to resist this where we can.
The virus, however, ‘wants’ life to go on as normal, so it can replicate and spread. This time it really was in our interests to disrupt our everyday life.
Then there’s the lockdown trading boom that has taken off with nary a word of ethical debate.
Sure, some wonder what manipulated meme stocks mean for markets, or whether crypto speculators will end up millionaires or bankrupt.
But we saw little if any push back urging today’s bedroom traders to spend more time thinking about virus victims in the ICU.
Maybe the world has gotten tougher, or greedier?
Or maybe we understand that we’ve all had to find our distractions where we could since March 2020.
Either way the explosion in wealth that has occurred right alongside the miserable pandemic has been much reported on – but little reflected over.
Incidentally, I’m sure some of you passive purists out there are now shaking your heads – if not your fists – and grumbling over talk of such greedy opportunism, while you sit sedately in your tracker funds.
Fair enough, but remember the reason you have seen those funds bounce back from the Covid crisis lows is because some active investors looked through the noise and bought back expecting better times ahead.
Indexing is a great strategy – one driven by the decisions of active investors.
911 is a joke
I thought about all this as I found myself enjoying – literally – a recap of the early days of the Covid crash in The Atlantic.
An extract from Adam Tooze’s new history of the Covid era, Shutdown, it’s a reminder of how crazy things got in the early days of March 2020:
The trillion‑dollar Treasury market, which is the foundation of all other financial trades, was lurching up and down in stomach‑churning spasms.
On the terminal screens, prices danced erratically. Or, even worse, there were no prices at all. In the one market where you could always be sure to find a buyer, there were suddenly none.
On March 13, JP Morgan reported that rather than a normal market depth of hundreds of millions of dollars in U.S. Treasuries, it was possible to trade no more than $12 million without noticeably moving the price.
That was less than one‑tenth of normal market liquidity.
This was a state of financial panic, which, if it had been allowed to develop, would have been more destabilizing even than the failure of Lehman Brothers in September 2008.
This all happened little over a year ago, yet I’d almost forgotten how mad things were for a few weeks back then.
I do remember huge chunks of value falling off my portfolio early on, like sheets of ice shearing off a melting iceberg.
But in the rosy afterglow of Central Bank intervention and the bull market that followed, my memory of the initial drama has faded.
Don’t believe the hype
The truth is I had a good pandemic, trading-wise. I sold down into the falls and mostly bought back before the climb.
By 22 March I was pretty sure the sell-off had become a headless panic and tweeted as much:
There’s too much panic and gloom out there. This is very bad, but it’s not the end of the world. It’s not even the end of the equity market. A message to my readers, and anyone else who needs it. pic.twitter.com/7oEI5yMYKu
— Monevator (@Monevator) March 22, 2020
Yet re-reading that is suitably humbling. I got some things right but many things very wrong.
Remember when just two weeks of self-isolation seemed worth fussing over? I recall a bunch of Hollywood stars singing that we could make it through – and that was about three days in.
My prediction of the death count, even if I was only thinking about the UK, was also woefully short.
In some ways, however, that’s the point.
When investors lose their bearings you can afford to get a lot wrong and yet for it still to be right to invest.
That’s because at such times your ‘margin of safety’ – typically squeezed dry by today’s mostly efficient markets – becomes a chasm. If you’re brave and you have the spare capital, you can bridge it with some confidence.
Or at least you always have been able to in the West, so far.
Maybe someday you won’t, and such a Tweet will look like hilarious hubris.
(But by then you may well have bigger worries on your mind, if so.)
Brothers gonna work it out
Thinking about how mis-priced securities were in early 2020 makes me wonder if I should simply sit in trackers until such times roll around again.
Remember, I’m the naughty active investor here at Monevator HQ. And a lot of the time my activity feels like running on a hamster wheel for just a few basis points of out-performance.
Maybe I should just wait for those rare moments when the markets go back to the 1950s? When Warren Buffett’s golden apples lie all around on the floor, ready to be scooped up?
Well perhaps, but again that’s probably hindsight speaking.
What’s more, the reason I have hitherto had the confidence to buy stuff that others are throwing overboard in bear markets is because of the months and years of trying to understand where the value was beforehand.
Fight the power
I do feel sheepish about admitting I now look back to March 2020 with a sort of grim fondness.
Only from an investing perspective, obviously. But I appreciate it’s still not a great look.
I saw the same nostalgia in the aftermath of the financial crisis. Indeed people today watch The Big Short not to be horrified but to laugh and toss popcorn into their mouths and remember how insane things were.
One thing is certain, as a potted history of the 1792 crash at Investor Amnesia this week showed, financial panics are old as markets.
So we’ll all be tested once more – on whatever axis of character you believe is most important – before too long.
For now though, have a great weekend!