The market does not reward optimism
A balanced approach to Covid risks is needed to navigate this market successfully
Even in the middle of a global pandemic, being a pessimist is a tough gig. Everything you read seems to be full of silver linings. The commercial property market has collapsed? There’s an opportunity to work smarter and save money on office rent. Supply chains have been routed by travel restrictions and factory closures? We can look to in-source more of our production and become less reliant on other countries. Interest rates have fallen through the floor? That means debt is cheaper, so now is a great time to boost our balance sheet.
When you look at just how insane things are in the world right now, you might wonder what planet others are living on when they start talking about ‘what the pandemic has taught me’. Yet, somehow, people have managed to take away all sorts of worthy lessons. Maybe they’ve come to realize what really matters to them. Maybe they finally have a chance to take their foot off the accelerator and reflect on their achievements. Maybe they’re just enjoying a break from office politics. Everywhere you look you’ll find an abundance of positive anecdotes drawing on personal experiences from the pandemic, exhibiting a willingness to adapt and embrace change while discarding past practices that might have outlived their useful life.
Sometimes it takes a crisis to find opportunities. No one wants to be known as the eternal pessimist, unable to catch a break while life passes them by. Well, that’s not entirely true. There are some professional pessimists out there, but most of the time they have a hard time drumming up business. French writer Michel Houellebecq, who seems to revel in taking a dim view of humanity, is always happy to provoke the naïve optimists of the world. Asked what a post-Covid world would look like, Houellebecq replied, with customary asperity, “The same — only worse.” Such a superficially depressing view can appear tiresome to many, who would prefer to focus on the possibilities life has to offer. When it comes to the markets, betting against human ingenuity is never a winning strategy over the long term. However, over short periods of time, betting on some degree of irrational exuberance is not necessarily a losing game.
In the current market, emotions are running hot. Battlelines are being drawn around divisive stocks like Tesla (TSLA) and megacaps like Facebook (FB), with investors plugging either a strongly bullish or bearish case. Elon Musk’s latest stunt of selling red silk shorts online to mock the short-sellers betting against the company was a classic showman’s response. However, the risk is that the whole thing descends into a circus, as more egos become embroiled in the argument. It’s already beginning to look like the petty back-and-forth over Herbalife (HLF), with hedge fund managers taking to television to either pump up the company or tear it down.
Such a superficially depressing view can appear tiresome to many, who would prefer to focus on the possibilities life has to offer.
As the Australian critic Anthony Daniels said of Houellebecq: “Prophetic qualities aside, I have said that he is a somewhat limited writer. I mean by this that he has a dominant theme to which he returns again and again, obsessively, and whose import is quickly grasped even after only a few pages.” Unfortunately, this could be true of many hedge fund portfolio managers who insist on talking non-stop about a particular company, theme, or strategy, to the exclusion of everything else. This single-minded obsession becomes so intertwined with their ego that it becomes almost impossible for them to consider another perspective. Unfortunately, this is true of optimists as much as pessimists. Investors can become so absorbed by a bullish thesis or so utterly convinced that the Fed will always be there to backstop markets that they miss the risks that are ever-present in the market.
It’s true that we can always choose between optimism and pessimism. But we can also choose how much risk we take on, and how long we are prepared to hold blindly to our views. There are those who, like Houellebecq, appear prophetic because they are always harping upon the same themes. There is little room for intellectual growth or a more nuanced perspective. This is death for any investor unless they are prepared to rely on luck alone. A pandemic may indeed be an excellent opportunity for growth in many ways. It could open us up to new ways of doing things and even spark a re-evaluation of what we really want. But focusing only on the positives because we feel like that’s the kind of energy we need to make money is a recipe for failure.
The market doesn’t care what kind of energy we bring, or even how keen we are to learn from every situation. It can flip us over at any moment, and if we aren’t flexible enough we can discover that our mindset is like a castle in the sky. There’s no doubt that eventually we will make it through the Covid crisis. Maybe we’ll even be stronger and more resilient on the other side. Maybe we’ll be smarter about how we work. But there’s no denying that there will be some pain for the economy and for many individuals who will be out of work, possibly for some time. There may even be shortages and price rises, and undoubtedly there will be insolvencies and many businesses that won’t make it through.
We should be making the most of our time in lockdown, wherever we may be. We should be using this as an opportunity to learn more, improve ourselves, gain some wisdom, and get ready for life after the pandemic. However, we can’t allow ourselves to become hostages to our own blind optimism or pessimism. The markets will rebound, but there will be some critical structural headwinds that could make an economic comeback harder than we think. Let’s not succumb to negativity, but let’s not be too naïve either. A balanced approach is usually most appropriate: we should recognize the good things that could come but also acknowledging the hardships that could be on the horizon.