Dear readers 👋👋,
First of all, thanks for being a subscriber and reader of my blogs in 2022. I wish you all the very best in 2023 and I hope you achieve the endeavors that you plan on starting or completing this year. This blog is about my learnings and understanding from the last two pandemic years. My plan is to make 2023 a better year in many aspects. Hope you find it useful and interesting.
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March 18th, 2020 was the day the world finally realized what a beast COVID is. Markets slumped to their lowest in a decade, travel was halted and our lives reached a standstill. By this time, China had already been suffering from the impacts of COVID but other parts of the world were still trying to understand the monstrous nature of this virus. The impact of this virus came in as a Black Swan moment in almost every part of the world. But there were signs prior to March 18th that most of us missed. Like havoc in China which had already passed a lockdown on Jan 23rd.
Theories about COVID being a man-made virus vs a bat virus remain but these theories have nothing to do with the black swan moment I am about to talk about.
What is a black swan moment?
The term “Black Swan” was popularized by Nassim Nicholas Taleb via his book The Black Swan. He described black swan events to have three characteristics:
- They are an outlier (a rarity) moment in history
- They carry an extreme impact and
- They allow humans to explain after the fact of its occurrence. After the fact explanation of the event makes us believe that the event was predictable.
Another important characteristic is that Black Swan may not be a Black Swan for everyone. For example, the twin Towers attack in September 2001 was a Black Swan for the world except for its perpetrators. People who had read signs of COVID back in November and were prepared probably managed to prepare better to deal with the outcomes of COVID.
Black Swan and Pandemic
But WHY am I talking about black swans all of a sudden? It is probably to pacify my desire to make my brain understand what went wrong (remember point 3 of black swan above) and how can I better prepare myself for 2023.
The pandemic appended a lot of lives, we lost loved ones, we lost money and more importantly, we lost trust in our instinct. Whatever we predicted will happen in the coming days or years, the opposite happened. It just showed us how uncertain and random the global economy is. Covid made me see two parts of this world. One in wealthy countries where despite high unemployment we continued to spend and buy, thanks to subsidies or unemployment checks. Other in developing countries where unemployment rose (as manufacturing shut down for a good part of 2020) and curbed the spending power of people as the government did not have enough subsidies.
Since we were spending more inflation rose but we continued to spend more. To safeguard our assets we tried to find a haven in crypto, which was hit hard by scams (my article on FTX fallout and finding trust in crypto) making us ask questions about the validity of crypto after all. Let me also state that the crypto debacle was not a black swan moment. My thoughts on crypto as a currency have always been clear, that it’s not an asset but great maths.
Apart from this one other thing failed in the entire world. Our financial models. Mathematical equations created by hedge fund analysts to build wealth faltered miserably. Cathy Woods (ARK Innovations), the star investor in 2021 (20% return) was rooted out in 2022 (-65% return).
Lessons from the Pandemic (2020 – 2022)
A few outcomes of the pandemic for me personally were:
- Human behavior is made to predict but we just can’t – As Philip Tetlock said in his book “Superforecasting”, we are super bad at forecasting. All great forecasters were wrong about the outcomes of the Pandemic. Examples are right in front of us. Look at big tech (from hiring to firing), the Feds and their soft landing. CHIPS (global shortage which led to escalating prices from cars to every electronic item). eCommerce (from shortage to high inventories). Oil (from negative in oil futures to all-time high prices). Real estate (Bidding wars to pacified demand to low demand). This list can go on.
2021 was a great year for markets and we got enormous returns. No one wanted that period to end. S&P 500 returned 28.1%. Oil investments returned 55.1%. The top 5 tech companies returned 24.1%. Real estate returned 40%. Funny thing was, the laggards industry of 2021 returned more than what SP500 returns on average. Communication gave 13.8%, Utilities gave 17%, and consumer staples gave 17.6%. In short, if you had put money in any sector you would have made money.
How did we forecast 2022 wrong? Who is to be blamed? The answer is not a single person. We misread growth as continuous growth and rise for the constant rise. Companies continued to invest resources in projects that would potentially generate income well into the future at the expense of more costs now. As rates rose and borrowing became costly the expenses rose more sharply than revenue. Salaries grew disproportionately. As the result, shareholders got angry and people got fired.
- We like mathematics to drive our investment philosophy and forget the butterfly effect – Moving to 2022, our minds were already heading for a period for more returns (2021 was phenomenal for the market). We build our investment portfolio based on mathematical models to drive growth. Mathematics is great but what it lacks is the ability to predict human nature. To simplify our mathematical models we treat stock markets as linear, whereas it is highly nonlinear. The butterfly effect is in play at all times.
The biggest factor that downplayed our understanding of 2022 was the word “SOFT LANDING”. Our faith in the Feds let us down and the soft landing became a crash landing leading to markets faltering in 2022. Subscribe now
Is there a car behind door number 3 or a ghost? Predicting 2023…
Is the black swan moment over? I don’t know. No one knows except a few which may cause the black swan. That is the point of the black swan. It is unpredictable. It is the same as the game show host problem. What is behind door number 3, no one knows except the game show host. We don’t even know who the host is. But can we be prepared for 2023? I think yes. If we take the lessons from the past and keep things simple. Understand that nothing is permanent and be ready for change.
How am I keeping things simple? In investments, I have increased my stake in SP500. There is no math involved in investing in SP500. Invest in companies that I understand. As Warren says, understand your circle of competence. I am investing to understand and invest more to learn about my circle of competence. Meaning, “I do not know everything”, let’s explore more.
Being prepared for another black swan. I will continue to reflect on the importance of understanding randomness in my lifestyle and writings. Somehow I would want to convert the black swans to gray swans and reduce the impact on me and the people around me.
Have a great 2023…
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