Here are the best things I read and thought about today –
“Have the record number of
investors in the stock market lost their minds
?” asks The New Yorker, given how investors appear persuaded that the markets are headed for a “V”-shaped recovery even as history suggests a more complicated story –
Stocks don’t always rebound in a “V” shape. During the last lengthy bear market, which accompanied the Great Recession, stocks prices started falling in September, 2007, and didn’t bottom out until February, 2009, seventeen months later. During the Great Depression, in the nineteen-thirties, the bear market lasted even longer. It began with the Wall Street crash of October, 1929, and lasted until the middle of 1932; by then, the market was down about eighty per cent from its pre-crash peak. Stocks didn’t hit new highs until the nineteen-fifties.
In the current context, that seems like a scary narrative. [Yale economist Robert Shiller, who shared the 2013 Nobel Prize in Economic Sciences, for his studies of what drives stock prices] told me that he had been thinking about the Great Depression, too. In early 1930, he reminded me, the stock market rallied for a while, much like it is doing now, only to roll over and go into another remorseless decline. “But nobody remembers that,” Shiller said. “The recent past is more resonant.” Some people do study historical episodes, of course. On Tuesday, Scott Minerd, the chief global investment officer at the Wall Street firm Guggenheim Partners, wrote on Twitter, “Stocks have clearly topped the recent uptrend. Now we find out if this is 1930 all over again.”
By the way, the Indian Chief Economic Advisor has recently predicted a V-shaped recovery for the Indian economy. He cited the example of rapid economic rebound after Spanish flu, which had a much higher kill rate. “Most people are more pessimistic than they need to be,” he remarked.
With too many moving parts, too much uncertainty, and above all, the unknown nature of the epidemic, I will certainly not buy into that prediction. I will be optimistic, but not indulge into any predictions, good or bad. Let the V, or U, or W, or L-shaped recovery take care of itself.
Meanwhile, Mint tells me that many Indian firms, especially those with weak balance sheets in sectors such as aviation and hospitality, are seeing hopes of any revival dwindle , and Forbes reports that Indian real estate , especially commercial, is set to collapse like a house of cards. Not V, or U, or W, this certainly seems like an “L” for these businesses.
Bill Nygren of Oakmark Fund has written an insightful commentary on
investing during crisis
. He advised –
I don’t know that this is a new lesson, but in situations like this you need to quickly realize where your skills might give you an advantage and where you have no business taking your own opinion seriously. We think we’re pretty good at figuring out business valuations. We’re pretty good at looking past current events and what companies could be worth on a long-term basis. That doesn’t mean we’re better than anyone else at guessing how the virus evolves or when the economy returns to normal. We need to make sure our portfolios don’t depend on us being experts in areas where we are not.
If you have been cursing yourself for a 40-50%+ decline in your stocks, don’t. There are bigger griefs in the world.
Consider the world’s largest technology investor Softbank and its investment in the office-sharing company WeWork. The latter had been valued at $7.8 billion at the end of September 2019 after the former agreed to its bailout. That was far from its once-lofty $47 billion valuation. Now, as announced by Softbank in its latest quarterly release, WeWork’s valuation stands at $2.9 billion. That’s a 60%+ decline in a span of eight months! And in billions of dollars.
To this, SoftBank’s founder Masayoshi Son, the richest man in Japan, says – “It was foolish of me to invest in WeWork. I was wrong.”
WeWork is not the only embarrassment SoftBank is facing. The Covid-19 pandemic have devastated some of its biggest investments. The satellite company OneWeb recently announced bankruptcy, India’s Oyo isn’t looking too good either, and Uber, where Softbank invested heavily, has failed to rise over its IPO subscription price, even once.
Anyways, check out Softbank’s March 2020 earnings presentation , wherein the firm has claimed its investments in billion-dollar-plus “unicorn” start-ups were on the ascent by using pictures of unicorns toppling off a cliff into the “valley of coronavirus” and then magically flying out of the abyss!
Coronavirus has made the world and its citizens, even the smartest ones, truly interesting. 🙂
I have never used a food delivery service to order food at home. But watching 15-20 delivery agents standing outside restaurants (in the pre-Covid days) waiting for orders made me wonder how do the companies really aim to make money, given the super-competitiveness of the industry, the costs and pain of acquiring and retaining customers, and scalability issues of running the business. Yesterday, I came across this brilliant article –
Doordash and Pizza Arbitrage
– that explains why this is really an awful business model –
You have insanely large pools of capital creating an incredibly inefficient money-losing business model. It’s used to subsidize an untenable customer expectation. You leverage a broken workforce to minimize your genuine labor expenses. The companies unload their capital cannons on customer acquisition…the only viable endgame is a promise of monopoly concentration and increased prices. But is that even viable?
…The more I learn about food delivery platforms, as they exist today, I wonder if we’ve managed to watch an entire industry evolve artificially and incorrectly.
By the way, news just came in that Indian food delivery major Swiggy is laying off 1,100 employees across grades and functions over the next few days, following in the footsteps of its competitor Zomato that let go off 13% of its staff recently. Sad!
Finally, for some time, keep aside V-shaped recovery predictions, flying unicorns, and all advice for investing during crisis, and read this beautiful poem on the best investment you will ever make – your child.
It’s by William Martin, from The Parent’s Tao Te Ching: Ancient Advice for Modern Parents –
Do not ask your children
to strive for extraordinary lives.
Such striving may seem admirable,
but it is the way of foolishness.
Help them instead to find the wonder
and the marvel of an ordinary life.
Show them the joy of tasting
tomatoes, apples and pears.
Show them how to cry
when pets and people die.
Show them the infinite pleasure
in the touch of a hand.
And make the ordinary come alive for them.
The extraordinary will take care of itself.
That’s about it from me for today.
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Thara TK says
A very realistic summary of the uncertainty. Well written sir.
Optimistically, I look forward to multiple ‘V’ s in different sizes staggered over 12 to 18 months on our return trip back to the cliff.
Interesting take .. especially if we believed in Buffett so far , i.e. “Fearful when others are greedy and greedy when others are fearful”
Mohan Lal Tejwani says
Very good article sir. And true investor should not expect V shape recovery. As always said ” Market always surprises”.
Thanks and best regards 😊