Fear Paralysis

This article focuses on the market reactions to COVID-19 but in no way intends to minimise the very real human tragedy.

This piece is a nod to my friend 10 Foot Investor who has written a very worthwhile musing on the market reaction to the coronavirus crisis. I recommend reading FEAR, which is the first piece I’ve seen that outlines that panic reactions come in two types: over-reaction and under-reaction.

Shamelessly, this article is a companion piece.

A Parable

Imagine you and I were sitting in the Randwick Ritz (late session, Wednesday night) watching the rollicking hilarity of The Gentleman while downing several pale ales. We’re having a fun time, every medium/low quality “growth stock” is flying, we make more in capital gains than salary.

Loose times.

Suddenly, the fire alarm briefly goes off. Weeeoooo, Weeeoooo! Oh blimey, we think. That’s a bummer. Crikey!

Just as we are about to leave our seats, the alarm sort of dies out like this: Weeeeooop. Then it stops. No more alarm. The film continues. A tad uneasily, we continue watching. Or do we?

That’s where we have the moment where your panic response is decided.

The logical thing to do is to at least get out of our seats and poke our head out of the cinema. If we had done that, we would have picked up on the slightest whiff of smoke. That, obviously enough, would be concerning. So we’d go further. Talk to the cashier. Oh yep, there’s a fire, get out. Great. I left my phone in the cinema. Bummer. Not allowed back in. Phone lost. Argh! But I’m safe. No smoke inhalation. Lucky escape. The Ritz is closed for 6 months for repairs.

But there’s another response.

We just keep watching. The movie is hilarious. We work hard, and it’s hard to organise a night off together, let alone to sink pale ales in an empty cinema watching an unusually enjoyable film. This is once in a blue moon stuff. The alarm has stopped. It’s just the flu.

The smoke builds up in the foyer. Gradually it seeps into the cinema and we realise that there is an actual problem. We open the door and the smoke, thick and nasty, like Sydney on any day in summer, flows in. We close the door. Uh-oh, something is happening, but now it’s not so clear what we should do. Do we venture out into the smoke and try to escape, risking asphyxiation? Now we’re really panicking, but we use our logic to determine that a fire engine will be coming for us. The fire will be put out. We will be rescued, I say. We both stay put.

Or do we?

We know the cinema well. The exit is a short dash of maybe 50m down some stairs from the specific screening room we are in. Straight down the stairs and out the door. One big breath and freedom. No need to inhale smoke. Plus, this is hardly a wooden building. It’s far more likely that smoke — wherever it is coming from — will get us, than actual flames. Plus, it seems to be seeping in the doors now. It’s thick. It’s early March and community infection is happening in the US. Reports from Italian doctors are dire (but some morons are still calling coronavirus just a flu).

C’mon mate, I say, lets dash. I take 10 puffs of my ventolin and the biggest breathe of my life and disappear into the smoke.

But you stay. Frozen. In panic.

Back To Reality

You don’t need to be a genius to realise what I’m saying. It’s not the people who sold shares in late February and March who panicked, it’s the people who held everything. Sellers aren’t as rare as you think. I have corresponded with dozens of readers who acted during that window of opportunity. Plenty fled the burning building, despite plenty of entreaties to wait for a rescue.

These are not flighty people. One gentleman who wrote me recently is now investing through his third crash. He is now “cashed up and trying hard to be patient.”

I have no words for people who were telling others to buy Webjet in March while telling people the flu kills more than the coronavirus. I don’t know whether that advice was panicked or lazy (see FEAR) but I feel sorry for any Fool who took it.

What is so bizarre is that some of the people who stayed (and told others to) are now completely invested in the view that it was the right thing to do. And maybe, now, it is. Maybe it’s too dangerous to run through the smoke now. Maybe it’s too hot. I don’t know.

But what I do know is that the popularity of articles saying that the world is over-reacting to the virus, or suggesting that economic lock-downs are not worth the lives they will save show that some people are in an extreme state of cognitive dissonance. Having fallen victim to fear paralysis, they huddle in the burning cinema frantically looking for evidence that they have made the right decision when most manifestly they have not.

Meanwhile, those with plenty of cash (including those who happened to have a lot of cash despite not selling shares) are in a better position to make calm decisions. Most importantly, they are in a better decision to calmly evaluate the opportunity set and make money in a bear market.

What is clear is that plenty of people are not doing that. For example, one week ago we had tonnes of influential people bottom calling like this guy. This is the equivalent of standing in the burning cinema and saying — without knowing for sure — that you’re literally about to be rescued this exact minute. In truth, you have no idea whether the fire engine has arrived, or if it’s still on the way.

Meanwhile, I’m being treated for smoke inhalation outside the cinema. I’ll tell you when the fire engine gets here — but I have no idea how much damage my mate in the cinema will sustain.

If bottom callers get it right they will dine out on it for years, but if they get it wrong they will never mention it again. I’ll be buying before, during, and after the market bottoms, but until the fire goes out, I’ll be darn cautious around that cinema.

Because sometimes: panic is freezing and rational is running.