Lessons from a Crisis

We find ourselves in the midst of a worldwide health crisis – the Coronavirus (COVID-19). Among the many ripple effects of the disease, and the world’s desperate attempts to contain it, have been a significant impact on financial markets.

Now, markets do not like uncertainty. It’s a lot like what happens when the power goes off and you suddenly find yourself in a very dark room. The first thing you do is stop, and then you grope around a while, taking small steps, trying to avoid a collision with something that you can’t see.

That’s pretty much what happens to a normally nimble and active player in the world economy. Unable to see what’s about to happen next, they slow down and they take their bearings, most concerned about not getting hurt rather than making any progress at all.

So, during times like these people slow their spending (except to buy three years’ worth of toilet paper) and companies slow down their operations.

All of the above happens during a “normal” shock-induced economic downturn. But when you add the compound effect of government-imposed (even if necessary) bans on travel, public gatherings and even businesses being open, well, there’s just no way to avoid an economy hitting the skids.

The only question remains is “how long?”

Well, here are a few things that we can learn as we contemplate this crisis.

This isn’t the first and it’s not gonna be the last. Now this point cannot be overemphasized. Crisis tend to shock us, and they cause us to say, “How could this happen?” But as we look at the long term, they do happen, quite regularly.

There is no perfect reaction – there is only underreaction and overreaction. Critics are always going to be fully employed during and after a crisis. And we do need critical analysis to discover how to do it better the next time. But time spent now imagining some perfect reaction to a crisis is time wasted. The pendulum of response will inevitably be under-done or over-done. The trick isn’t to be perfect, but to be proximate.

Every crisis exposes oversights. “Oops, I didn’t see that one coming!” Crisis shows us what we weren’t prepared for. The value in post-crisis criticism (which we will eventually get to) is to identify how we could have realistically done it better this time, so that we can and will do it better next time.

For most of us as individuals, that means discovering how well we acted on that advice that we’ve heard all along and which too many of us have successfully ignored – have an emergency account of [cash] larger than you think that you’re gonna need. I’ve always recommended six-months of income, and people used to look at me like I was crazy. Not so much anymore.

Every crisis presents opportunities. Just this week, I read that money is flowing out of stock funds at a record pace. What that means is that record numbers of owners of those funds who were unprepared to ride out a shock like this sold their greatly devalued (on sale) shares to some buyer somewhere that was ready and willing and able to buy them at a deeply discounted price.

Every crisis rewards the prepared and the purposeful. That same story is repeated over and over again in times of crisis. And the common denominator for those ready and able to take advantage of those opportunities is low levels of debt going into the crisis and high amounts of cash.

It’s kind of late to prepare for this crisis. It’s upon us and all you can do is hunker down and hopefully survive.

But as you sit in your house, washing your hands and maintaining appropriate social distances from one another, is it too much to think that we might promise ourselves that we’ll learn our lesson for next time?

Because I can promise you this, there will be a next time.

 Offering you Wisdom on Wealth, I’m Byron Moore.

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