Before we get started with the essay, we would like to express our deepest sympathies to those who have been affected directly and/or indirectly by the COVID-19 pandemic. It can take a tremendous toll when we are:
Concerned for our health and the health of others.
Concerned about the future of businesses that are centerpieces to our lives and the lives of others. Some are private companies that employ people who may be hurt though they have done nothing wrong. Some are public companies in which you are invested and have seen a material decrease in value.
Bearing witness to unfair tragedy locally, nationally, and around the globe, and feeling powerless to effect material change.
If you are reading this in early April 2020, you are probably at least a little mentally fatigued from frequent breaking news updates. So, we are going to make a few broad points with the purpose of painting a backdrop to have hope and optimism regarding your investments. We acknowledge it is not a complete picture.
REASONS FOR HOPE AND OPTIMISM
Oh Danny, this isn’t Russia.
In the 1980 cult classic movie, Caddyshack, a teenaged caddie bemoans the uncertainty of his future to the golfer for whom he is caddying. The golfer, played by Chevy Chase, abruptly replies “Oh Danny, this isn’t Russia.” The biggest reason for hope and optimism is the U.S. is still the best country in the world by a long shot. U.S. citizens have historical and prospective reasons for hope and optimism.
… and this isn’t Italy.
Poor Italy. We have all seen and heard a great deal, perhaps too much, about the calamity in the hospitals et al. Tourism was approximately 13% of the Italian economy(1) and the tourist destinations are largely empty. When will the tourists return? Quarantine is in broad effect, and there is no $2 trillion aid package coming. The Italian people have come together with such strength; it is truly inspiring.
Yet in the markets, from high levels in late February to March 23rd, the Italian stock market and U.S. stock market indexes basically fell in step and by similar amounts. There are many factors affecting markets, but given the tragedies in Italy, it would seem the Italian stock market would be down much more than U.S. indexes. One implication is that the U.S. indexes went down too far.
… and this isn’t the Spanish Flu.
The Spanish flu of 1918 was so nasty that we will not go into the horrific details. Suffice it to say, approximately 25% of the world’s population was infected, and it had a meaningfully higher mortality rate than COVID-19 to date(2). It is still the early days for the U.S., but according to Dr. Deborah Birx, the coordinator for the White House Coronavirus Task Force, on March 26th, model predictions for 2.2 million deaths in the U.S. are not squaring with “on the ground” data. The U.K. just reduced the expected number of deaths from 500,000 to 20,000. No country (except tiny countries like Morocco and Liechtenstein) has experienced an attack rate of 1 per 1000(3). However, Dr. Birx’s family history also provides a cautionary tale about the importance of quarantine. When Dr. Birx’s grandmother was only 11 years old, she brought the Spanish flu home and ended up infecting her mother who did not survive. Government safety nets in place today were not in place then.
Yet the Dow Jones Industrial Average, a stock market index, was up in 1918 and again in 1919(4). There are many factors that affect markets. 1918 markets certainly cheered the end of World War I, and valuations probably expanded from wartime lows. But the Spanish flu bloomed when the troops came home in late 1918, and it continued to wreak havoc through 1919 yet returns were positive for the index.
Our team members at RAM have varying assessments of the chance that stocks finish flat to up for the year 2020. While it may seem highly unlikely in this moment, it is not out of the realm of possibility.
We got through the Spanish Flu concurrent with a world war, and we will get through this.
… and our scientists are amazing.
As you probably know, RAM has a small cap strategy. What you probably do not know is that we invested a tiny amount in two interesting stocks. The first company has a therapeutic creation process which has been instrumental in developing immunotherapy for SARS-COVID-2, swine flu, avian flu, pandemic flu, and long list of other conditions. The company is now working with health organizations on COVID-19. The second company created inexpensive rapid tests for antibodies to several infectious diseases, including Ebola, and the tests do not even require an electric power outlet. It too is now working with health organizations on COVID-19.
The subtle but hugely important point, in our opinion, is that we invested only a tiny amount. Why? Because we believe there are many other companies filled with brilliant minds working around the clock that will also provide solutions to these problems. Help is on the way.
… and you will be stuck in traffic again soon.
Below is a graph of traffic congestion in key places in China created by Deutsche Bank. The red line is from 2019, and the blue line is from 2020. You can see that before late January, the traffic congestion patterns were quite similar. In February there was considerably less traffic congestion than last year because of quarantining. Traffic congestion steadily increased in March and is now almost on par with last year. If U.S. traffic congestion follows a similar pattern, roads will gradually become busy again perhaps in late April.
One can search the internet for similar data around light pollution and air pollution from factories to get the same sense that China has made progress moving past the effects of the virus, and someday, the rest of the world will too.
Please feel free to reach out with questions, comments, or concerns, or simply to update us on changes in your life.
All the best,