Suppose that you got a letter from God in November 2019 saying that coronapanic would start in March 2020, with unprecedented shutdowns of schools, factories, retail, restaurants, etc. God would have told you that China, Japan, and Taiwan would experience relatively minor shutdowns, that Sweden would have no shutdown, that everyone would try to meet by videoconference, and that most countries and U.S. states would have lengthy shutdowns.
The most obvious response to this as an investor would have been (1) buy China, Japan, and Taiwan, (2) short the U.S., (3) short Europe, (4) buy some individual stocks such as Zoom, and (5) maintain the strategy until a vaccine authorization (not “approval”!) was announced (not because of a belief that COVID-19 vaccines will eliminate COVID-19, but because of a belief that other investors would believe that COVID-19 vaccines will eliminate COVID-19 and therefore coronapanic-related shutdowns).
Let’s see how that would have done. We’ll say that we started the strategy on November 15, 2019 and closed it out on November 10, 2020 a day after Pfizer celebrated the defeat of Big Pharma’s nemesis (Donald J. Trump) by finally disclosing Phase 3 vaccine trial results. We would use 40 percent weight on Asia, 40 percent on the US/Europe short, and a remaining 20 percent on individual stocks.
Let’s first benchmark this against a not-favored-by-God person buying and holding the S&P 500. SPX went from 3120 to 3360 (up 7%).
Element 1 (buy Asia): SSE (Shanghai Index) went from 2911 to 3330 (up 14%). The Nikkei (Japan) went from 23160 to 25087 (up 8%, but this would be called the largest move by far by the journalists writing about COVID in India!). TWSE (Taiwan) went from 52.20 to 61.60 (up 18%).
Element 2 (short the U.S.): as noted above, this would have lost roughly 7% (we’ll ignore dividends since the stuff we bought long would have paid dividends as well).
Element 3 (short Europe): Let’s use the MSCI Europe index. It went from 136 to 127 (down 7%).
Element 4 (buy Zoom, et al): ZM from 68 to 433 (up 536%!), AMZN from 1760 to 3231 (up 83%)
So we’d be up roughly 12% on Asia, flat on the U.S. and Europe (assume equal weight between these two and they moved in opposite directions), and up about 250% on the individual stocks. After transaction costs, given the assumed weights, we’d be up 50-55% for the year.
That’s a lot less than I would have expected!
Above: God creates a Robinhood user.
I think the most obvious response would be to laugh it off as absurd, because in November 2019 who would have believed that so much of the population was cowardly and stupid enough to go along with all that nonsense?
Maybe you should ask the families of the over 600,000 dead in the USA alone. Then you can go on to the other 3.5 million throughout the rest of the planet…being that you’re so brave.
Are you still waiting for gods letter regarding engine reliability in a piper malibu?
Toucan Sam: Since I’m still flying the Cirrus (while clutching the parachute handle, of course), I think the answer is “yes”!
There is way too much to unpack here but a few observations:
1. the equity market prices on future cash flows to eternity discounted to present value so the event of one year is not that important except as it affects this pricing mechanism. The issues in say Japan are longstanding and it is dubious that Corona will have much of an effect on Japanese cash flows discounted from eternity. Anyway that is what the market thinks — and what the market concluded is on average a lot more reliable than what any individual or some pundit thinks.
2. It is only new information that affects 1, supra. that moves markets in the longer term.
2. Starting and ending dates are important. The ones chosen here are random — when Pizer announced X is not when the market knew X. The Chinese market may very well have known and priced in that Chinese labs are developing deadly viruses and their safety protocols are insufficient — so whatever the news was about Wuhan may to a large extent have already been priced in, i.e. it was already reflected in the price to the Chinese shares ex ante. At some point lots of people knew that Pfizer, J&J, Moderna were developing/would likely succeed in developing this technology.
3. The US market hit bottom i think it was 23 March 2020 and then started rising so it was at that point when the media was hysterical with body bags and so on that the market figured out that what was happening in the US would not have a big effect on 1, supra.
4. Zoom was essentially new information — some people but not most had heard of that technology and some people but not most perhaps could have foreseen its uses and profitability. Hence the big price rise.