Global & domestic equity markets have seen significant correction and most major indices are down about 30%. There is panic, negativity and pessimism all around. These sentiments remind of golden words by legendary investor Warren Buffet: “Be fearful when others are greedy and be greedy when others are fearful. 

It will however be naïve to conclude that there will be no significant impact of Covid-19. This, unlike issues in the past, is an issue that govts & central banks cannot buy-off. We simply cannot throw money at this problem to send it away. So the point is that the economy will stay closed for some period of time. If we try to bring the economy back too fast we could have an echo or rebound in the number of Covid-19 cases.

A temporary drop in demand and a change in consumer trends will definitely take place; Supply chain issues may also linger. The point to stress here is the uncertainty of what lies ahead of us in the near term. Nobody knows exactly what’s going to happen with the disease and nobody can tell for sure what’s going to happen with the economy. So there’s no justification for having a confident view for the near term. The markets think it’s their job to sell the void with forecaster information. The question on our mind is are these forecasts any good? What good is such information if the probability of these forecasts coming good are low. The point is nobody knows. You can decide to be optimistic or you can decide to be pessimistic. We think there is no data for such a situation because it has never happened before.

In the present circumstances how do we manage risk? This question is indicative of the challenge we face today. When most people say manage risk, it means avoid a potential fall off. But there’s another risk. Which is the risk of missing out on gains. Let’s say that you and I decide that there is a 60% probability of markets being down three weeks from now. What do we do in our portfolio to answer this 60% probability of the decline. But we must not lose track of the fact that we also have to deal with the 40% probability that it’s up! If you are out of the market then you will have missed out on something and will regret it. We prefer to think of risk as undesirable outcomes. While the fundamental outlook on the disease and for the economy in the near term are poor, the stocks are on sale. These sale prices cover a lot of the carnage.