rogernusbaum

The title of this post comes via Game of Thrones. "You know nothing" was a tag line of sorts said several times by Ygritte, the Wildling warrior, about her love interest, Jon Snow. If you engage in social media at all, you might have seen jokey posts along the lines of "I had no idea how many of my friends were epidemiological experts." I saw a particularly funny one, "so glad all of my friends can go back to being constitutional experts." The catalyst for this posts is the informational overload from the Coronavirus. There have been countless news stories saying we overreacted, we shut the economy down for nothing which is resulting in huge economic hardship. Conversely, there have just as many news stories saying we underreacted resulting in far more lives lost than needed to be lost which lead to immense emotional hardship. We are arguing over why we should or should not reopen the economy right now, we are arguing over whether we need to wear masks at Costco and the list goes on.

The latest news (that I am aware of) in this context is that Sweden which at first was pilloried for doing very little in the way shutting things down, may actually have been right according to the WHO. You can click through and draw your own conclusion.

Here's the thing, I have no idea about any of it. I have no idea whether we overreacted or underreacted. I have no idea if it's too early to reopen or if we should have already done so. I have no idea how to analyze the tradeoff between lost jobs and lost lives. I have no idea whether Costco is correct in making customers wear masks (as a private corporation with publicly traded stock they are within their rights, that much is clear). I know nothing and chances are you don't either. According to the CDC, back in 2018 there were only 3369 epidemiologists in the United States. I am not one of them and chances are you aren't either. I have tried to be consistent across all platforms in saying "we don't know yet" about anything and everything related to the virus (actual R0 and death rates) or how to treat the virus (we go back and forth repeatedly on hydroxychloroquine for example).

While I have no business opining on what other people should do or think I am entitled to make decisions for myself (and in my unique case, for the firefighters who answer to me as the chief of the department). My lifestyle just so happened to have been kind of physically distant before this all started, I started wearing an N-95 mask for errands kind of early on but not very early and my hunch is that there is nothing new for the typical EMT/Paramedic (I am an EMT) about washing hands frequently. The biggest disruptions for me have been having to workout at the firehouse, not the gym, needing a haircut and being far more tactical about grocery shopping. I mention my experience with this to acknowledge I probably have biases that influence my conclusions about how to "take care of my business" as Run Burgundy might say. This event has not been that bad for my wife and me. While we're grateful of course we can't rule out being less lucky when the next terrible thing comes along. We have no idea what/if/when/how the next one will be.

The idea of knowing nothing and just focusing on what you have a shot of controlling is of course relevant for investing. @ericbahn tweeted that this April was the best April for the stock market in 45 years while at the same time first quarter GDP contracted 4.8% on an annualized basis and that we have now lost 30 million jobs.

These things happening at the same time makes no sense. But of course, the stock market has a long history of going up when it shouldn't. The potential for being wrong is why it is a lousy idea to get all the way out when things get bad. Clients are positioned defensively right now which means the portfolio is hedged with several alternatives that tend go in the opposite direction as the stock market and we've made a couple of sales all of which leaves us plenty long in case stocks go up. As this has played out, we've generally been less volatile in both directions. Accounts have recovered some, along with the market but probably less so. As I have worded it before, with my gradual approach for defense you wished you were more hedged on the way down and less hedged on the way up but the important thing is to not get left behind because you made a big bet, didn't know what would happen because that is impossible and then completely miss the upmove because as we sit here now, we don't know whether there will be another down leg down.

Since we effectively know nothing then it becomes important to mitigate the consequence for being wrong. Just as having some Purell in the car and wearing an N-95 mask for errands can mitigate the consequence for not fully understanding the virus so too can avoiding drastic portfolio action (like selling everything) mitigate the consequence for not fully understanding stock market behavior.