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Second-Order Effects Of The Coronavirus Panic

Mar. 09, 2020 12:18 PM ETAMZN, BRK.A, BRK.B, DVA, META, FMCQF, FMS, GOOG, GOOGL, PGR, SPY, ULTA, URTH20 Comments
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  • While everybody is staring at confirmed cases climbing globally, more important long-term effects of the coronavirus outbreak are in the making.
  • Investors that accurately think through potential second- and third-order outcomes could generate significant alpha.
  • Here is a first list of theoretical outcomes and how they would effect some businesses and countries.
  • This idea was discussed in more depth with members of my private investing community, Stability & Opportunity. Get started today »

Second-order effects

Every action has a consequence, and each consequence has another consequence. These are called second-order effects.

While the dramatic coronavirus outbreak in China was already known, analysts and investors were staring at the daily increases of confirmed cases, and, as soon as they noted a slow-down, U.S. stock markets reached all-time highs. – What does this tell us? – Well, the uncomfortable truth for data-driven, math-focused, chart-steering folks like us, is that looking at figures alone can make you blind: Effectively, in the meantime, the obvious happened, as single infected travelers brought the virus to Europe and the U.S., where it silently started to spread.

Therefore, in this article you won't find many figures and statistics, but simply some thoughts on what else could happen because of the outbreak that could effectively produce permanent change. The list doesn't aim to be exhaustive; it simply wants to provide some food for further thoughts.

One simple mistake investors often make is to assume that a crisis is only what it seems and everything will revert back to normal once it's over. While true in many cases, in some cases it is not. For example, after 2009, bank regulations got tougher and Warren Buffett predicted lower returns on equity going forward. When such second-order effects become visible, investors panic and stocks go into freefall, as the feeling of uncertainty becomes intolerable.

So you should not simply buy, say, a luxury goods maker which currently suffers from less travelling around the globe, assuming after the outbreak its business will rapidly return back to normal. It may or may not happen, depending on a few things (among many others):

1. How long the outbreak will last

If it lasts, lasting changes will more likely be the consequence. For example, if mass quarantines become the rule around

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This article was written by

Early Retiree profile picture
Having always been a learning machine, I speak five languages, have worked as a sales agent, project manager, translator, computer consultant, software engineer, built a house with my own hands, published books and essays on literature, philosophy and art, have written for magazines of various kinds in different countries. After retiring early in 2004, little by little, I have become a fund manager for some friends and myself, following the principles of value investing laid out by Benjamin Graham, Phil Fisher, Charlie Munger and Warren Buffett. In my article “The Portfolio For Early Retirees” I presented a simple and practical way to structure an investment portfolio for early retirees. In 2015 I won the Seeking Alpha Contrarian Contest and was among the winners of several other competitions. I have also been a regular contributor to Seeking Alpha Pro right from the start.I strive to gather above-average knowledge about my stock picks. As this takes many hours, despite managing my portfolio full-time, you should not expect me to throw out new ideas each and every week. My Investment Strategy Statement can be found here.Legal Disclaimer: My contributions to Seeking Alpha, or elsewhere on the web, are to be construed as personal opinion only and do NOT constitute investment advice. An investor should always conduct personal due diligence before initiating a position. Provided articles and comments should NEVER be construed as official business recommendations. In efforts to keep full transparency, related positions will be disclosed at the end of each article to the maximum extent practicable. I am not registered as an investment adviser, nor do I have any plans to pursue this path. No statements should be construed as anything but opinion, and the liability of all investment decisions reside with the individual. Although I do my utmost to procure high quality information, investors should always do their own due diligence and fact check all research prior to making any investment decisions. Any direct engagements with readers should always be viewed as hypothetical examples or simple exchanges of opinion as nothing is ever classified as “advice” in any sense of the word.

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Comments (19)

This Time Is Different profile picture
Another second order effect that seems to be evolving here (just based on SA comments as well as general media commentary, nothing hard) is that government intervention in the markets is needed and a good thing + just wait out the virus and good times will return. Basic ignorance of the impact of super low interest rates + massive government enabled debt.

This potentially sets up a follow-on scenario where tunnel-vision on corona leads to ignorance of the massive global government funded debt pyramid that is near collapse.

We can nearly 100% guarantee that both US political parties will push through some sort of "stimulus" package in an election year. When that doesn't work as intended, you could foresee the real financial collapse occur that makes this crash look light. Rising interest rates, government bond defaults, massive stock market revaluation.
424270 profile picture
Started strong but then deteriorated into speculation and politics-driven mumbo jumbo.
This Time Is Different profile picture
Since the comments generally seem to be explaining why you’re wrong or shouldn’t bother trying, I’d say maybe you’re on to something! Anyway, whatever happens, I appreciate the Howard Marks approach.
The markets has risen and risen since the 2008 crisis without fundamental support. Now it has only crashed a little and people panics. Look, we are only back to 2019 level. S&P 500 bottom level was 735 in 2009. Now it is 2744 including the recent correction. There is room for another crash between 40-60 % and we are still double up since 2009..
the virus and cheap oil are not going to accomplish your wet dream of buying at liquidation values. a debt implosion would do it. careful what you wish for
Texas Investor profile picture
I've posted this a couple of times because I think really important.

The gov't health basically wants to shut down the economy -- funded with a massive gov't bailout...

This link provides a transcript of Scott Gottlieb's (who is a leader in the gov't health bureaucracy -- former head of the FDA) Face The Nation interview yesterday...

Here are some highlights -- full on crazy/panic:
"The next two weeks are really going to change the complexion in this country. We'll get through this, but it's going to be a hard period. We're looking at two months probably of difficulty. "

"Well, I think no state and no city wants to be the first to basically shut down their economy. But that's what's going to need to happen. States and cities are going to have to act in the interest of the national interest right now..."

"Close businesses, close large gatherings, close theaters, cancel events. I think we need to think about how do we provide assistance to the people of these cities who are going to be hit by hardship, as well as the localities themselves..."

"And we're going to end up with a very big federal bailout package here for stricken businesses, individuals, cities and states."

Trump's tweeted this morning that he disagrees -- so there is going to be battle between the public/gov't health bureaucracy and the Trump administration...how bad will it get...
Edward J. Roche profile picture
I still feel that covid -19 is being very much overhyped by the media. As you point out most stories just cite/headline the total number of cases. But in fact since many people are recovering the number of Active cases which is what counts is below peak. And of course we are seeing pictures of people in haz mat suits with just about every story.

The total number of deaths (under 4000) is very small compared to the hundreds of thousands of deaths we see worldwide from the seasonal flu. And it worthwhile remembering that there is a vaccine vs. the seasonal flu and there are treatments/therapeutics. By the current healthcare logic we should have a mass panic every year concerning the seasonal flu. Schools should be closed etc. But as a society we have decided that that would not be a good trade off. We in fact accept that some children will die from flu by keeping schools open. Life is risk.
All being hyped by the libtarded MSM in order to try and bring down Trump.
I am a value investor, not the cigarbutt type . but its easy to notice that f.a.n.g has easly outperformed in the bull market and fall less in that corona shit at least till now. i thought they will fall more then the low multiple stocks, thats not the case
Give it a while longer. The trader/momentum types have not been killed off yet. Today FANG, TSLA, etc. are falling way more than S&P with the exception of GOOGL because of their gigantic cash position imho.
Actually you are right they are still outperforming. Early this morning they were not. Traders are not dead yet. AMZN cannot maintain their growth rate in a recession and cannot maintain an 80 PE at a some, rapidly approaching, point.
All faamg (msft instead of nflx) have very strong balance sheets and significant amounts of cash. Therefore, they are more likely to survive the downturn and adapt than most other companies, even if they take significant hits to earnings. For some, like Amzn, the downturn could even turn out to be a blessing in disguise, if some of their major competitors struggle or even go bust
School and work will not be moving online, for the simple facts that school is "free" daycare for parents and that the vast majority of people need to be at a location to perform work which is not their home office. The exception are managerial types of jobs or tech jobs.
simplevalue274 profile picture
I have learned its practically impossible to see how things play out. I feel like part of Buffett´s genius is he doesn´t even try to. Where everyone else is getting whipsawed he just sits there and steadily accumulates. Amazing more people don´t do it but perhaps not considering human nature.
Exactly. Have rules and follow them all the time and accumulate when stocks meet or exceed the expectations of those rules. There are Tons of great businesses I have been wanting to buy for years and most of them are still not even close to my required rate of return. Which means most days I survey the carnage and end up buying more BRK. The man has 120~ billion to spend. Very exciting.
In times like this one can realize some of his teachings on a deeper level
value stock as usual fall much more then the f.a.n.g stocks
so your say about world going back to lower multiples... mmm
i have to disagree.
thanks for the post
For now. Remember, FB and Google are dependent on online advertising. When demand for the underlying products falls, the first cut is to the ad budget. When that piece breaks, the invincibility of FANGS will come into question, at least for a while.
Wrong. When demand falls companies increase sales efforts. Ad spending goes up not down.
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