February 1, 2020

Given the media frenzy surrounding the emergence and spread of the Wuhan Coronavirus, we thought you’d be interested in Mickey’s next Investing column for the Indianapolis Business Journal, which will be published on Friday, February 7. As stated in the column, we have no special insights into viruses. However, we’ve been in this business long enough to know panic-induced sell-offs can be good buying opportunities for long-term investors. The sell-off last week was fairly mild—until Friday. Nobody knows what will happen next week, so this column is meant to help prepare you if things really seem to be going off the rails.

We’ve also attached two illustrations you might find useful/interesting:

·   Dow Jones Industrial Average Market Resiliency. This chart shows the price history of the Dow Jones Industrial Average (DJIA) since 1896 and all of the major calamities investors and stocks have overcome over time.  Past performance is no guarantee of future results and we don’t know if the Wuhan Coronavirus will even make the list, but history suggests “this, too, shall pass.”

·   Market Timing – Caution. This second chart shows the futility and expense of trying to “time the market.”  Investors have an uncanny tendency to buy high (when they’re feeling overconfident) and sell low (when they’re frightened).  We often hear, “I’m going to sell now and get back in when things settle down.”  The problem is, you have to get both the “sell” and “get back in” part right.  It just can’t be done.  By the time “things settle down,” the train has long left the station.  If you had invested $100 in the S&P 500 on January 1, 1970, stuck it in a drawer, forgot about it and never opened a single account statement for 50 years, you would have had $3,509.43 by December 31, 2019.  As an added bonus,  you didn’t waste 15 seconds in 50 years worrying about stuff you can’t control.  However, if you thought you smart/clever enough to “time the market” and missed just the single best day in each of those 50 years (0.4% of the days), you would have ended up with just $611.46.  Plus you experienced tremendous stress worrying about stuff you can’t control.  Which would you rather have?


Coronavirus-induced volatility your friend, not enemy

Mickey Kim / February 7, 2020

Our primal “fight or flight” instinct was vital for cavemen to survive, but investors must resist their natural urge to panic when stocks hit an inevitable rough patch. Whether caused by fears related to last year’s inverted yield curve or the crisis du jour, the Wuhan Coronavirus, losing your head and abandoning your plan can be deadly to long-term returns.

In fact, savvy investors who can keep their heads while others are losing theirs embrace shortterm volatility as their friend that allows for returns higher than the miniscule risk-free returns earned on money markets and savings accounts. This is because timid and ill-informed investors bail out, leaving significant opportunities for those who stick with their plan and stay the course.

If you’re like me, you had never heard of a “coronavirus” until the scary headlines went “viral” in recent days, leading to apocalyptic predictions of impending doom and lower stock prices. I have zero informational “edge” on viruses, but have been around long enough to know fear-driven events often create meaningful buying opportunities.

I did some snooping around and here’s what I found:

  • Coronaviruses are a large group of viruses that cause diseases in mammals and birds. In humans, the virus causes respiratory infections which are typically mild, but can be lethal. In rare cases, they are what scientists call zoonotic, meaning they can be transmitted from animals to humans. The name refers to the outer edge of the virus looking like the corona surrounding the sun.
  • The apparent source of the Wuhan Coronavirus (already the 6th major viral outbreak since 2000) was a market where live animals were sold for human consumption. There have been 2,700 confirmed cases and 82 deaths in mainland China, not yet large by historical standards.
  • The SARS (Severe Acute Respiratory Syndrome) virus was also a coronavirus. SARS was first reported in China in November 2002 and led to 8,098 confirmed cases by July 2003 and 774 deaths.
  • The H1N1 influenza (“Swine Flu”) virus was a pandemic outbreak across the globe which lasted from 2009 to 2010 and led to an estimated range of 151,700 to 575,400 deaths.
  • The MERS (Middle East Respiratory Syndrome) virus was also a coronavirus, with the first reported illness in Saudi Arabia in 2012. There were at least 2,428 confirmed cases and 838 deaths.
  • Ebola hemorrhagic fever is a disease caused by one of five different Ebola viruses. The first human outbreaks occurred in 1976 in Africa, but the biggest scare was the 2014-2016 West Africa Outbreak, which led to 11,000 deaths.
  • The Zika virus is spread through mosquito bites and can cause birth defects and other neurological defects. In 2016, Brazil estimated as many as 1.5 million people had been infected.

It is impossible for investors to know what the eventual impact of the Wuhan Coronavirus will be in human or economic terms. However, Sam Stovall, Chief Investment Strategist at CFRA, found returns for the S&P 500 were positive (some strongly so) at 30-, 60- and 90-days after the first U.S. case for the prior five viral outbreaks. Past performance is no guarantee of future results, but history suggests stocks will overcome the current scare, as well.

S&P 500 Returns After Recent Virus Crises

Virus First U.S. Case  30-Days Later 60-Days Later  90-Days Later
SARS 3/12/2003 8.0% 16.1% 22.5%
H1N1 3/25/2009 6.4% 9.0% 10.0%
MERS 5/2/2014 2.3% 4.9% 2.6%
Ebola 9/30/2014 1.1% 4.8% 6.0%
Zika 2/2/2016 4.7% 8.9% 9.4%
Wuhan 1/21/2020 ? ? ?
Average 4.5% 8.7% 10.1%

It’s difficult to stick with your long-term plan when the talking heads are screaming the sky is falling and urging you to “don’t just sit there, do something.” Notice how they always speak in terms of points, not percentages. “Dow Jones plunges 450 points” (January 27) is a lot scarier than “Dow Jones falls 1.6%.”

Stock prices fluctuate wildly, but the underlying business valuations don’t. Since 1945, declines of 3-5% have occurred every 7 months on average, with or without viral crises. Focus on what you can control (your reaction to volatility) and leave the rest (the sources of volatility) to the Chicken Littles. Remember, the more often you look, the more volatility you experience.

The opinions expressed in these articles are those of the author as of the date the article was published. These opinions have not been updated or supplemented and may not reflect the author’s views today. The information provided in these articles does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular stock or other investment.


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