March 18, 2020

What Has COVID-19 Done To The Economy? | Morgan Housel on Modern Wisdom #151

Check out the Modern Wisdom Episode Page & Show Notes

Key Takeaways

• In a typical recession, stocks can drop 15-20% in a single region; with the coronavirus, the market is dropping 20%+ across multiple geographic regions
  • The economy shut down almost overnight—we don’t know what will happen next or what the recovery process will look like
• The headlines make it seem like everyone is pulling their money out of the stock market, but the truth is: >90% of investors haven’t done anything with their money
  • During the August 2011 crash (when stocks fell 20%), 98% of Vanguard investors didn’t move their money
  • The majority of people aren’t panicking over the market: “A lot of people aren’t even paying attention … Most of those people don’t even know the password to their brokerage account.” – Morgan Housel
• A total lockdown in the US isn’t likely, so it may take longer to restart the economy
  • “The short-term hit that we take might be less, but I have a feeling it’s just going to be a much more dragged out process to both experience the downturn and then a slowness in the recovery afterward” – Morgan Housel
• Morgan keeps a large portion of his portfolio in cash (about 20%) to avoid huge swings in his net worth: “I don’t manage my money to achieve the highest returns; I manage my money to get the best night of sleep” – Morgan Housel
  • “It’s exchanging the opportunity to make a killing in exchange for making sure you don’t get killed”
• “If you want to earn 10% a year on your money over the long haul, you need to put up with the fact that every couple of years, you might lose 20, 30, or 50% of it for a somewhat short period of time. That’s the price of admissions to the markets.” – Morgan Housel

Intro

• Morgan Housel (@morganhousel) is a partner at Collaborative Fund and a former columnist at The Motley Fool & The Wall Street Journal
• Host: Chris Williamson (@ChrisWillx)

Books Mentioned

• Morgan’s next book is due out on September 8th, 2020: The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness
• Morgan enjoyed the book, Tribe: On Homecoming and Belonging by Sebastion Junger, which covers how people form strong bonds during difficult times

Impact Of The Coronavirus On The Stock Market

• In a typical recession, stocks can drop 15-20% in a single region, with the coronavirus, the market is dropping 20%+ across multiple geographic regions
  • The economy shut down almost overnight–We don’t know what will happen next or what the recovery process will look like
• On March 14th, the US stock market fell ~10% in a single day–The two single-day drops worse than that was the crash in 1987 and the Great Depression in 1929
• “Quite a bit” of stock market sell orders are done automatically by computer algorithms and during volatile times, such as the current market, they can go haywire
• Public companies will not be as profitable for the next year or so
• The headlines make it seem like everyone is pulling their money out of the stock market, but the truth is that >90% of investors didn’t do anything with their money
  • During the August 2011 crash when stocks fell 20%, 98% of Vanguard investors didn’t move their money
    • The majority of people aren’t panicking over the market: “A lot of people aren’t even paying attention…Most of those people don’t even know the password to their brokerage account” – Morgan Housel
• Morgan’s advice: Dollar-cost average into the stock market–Set a bit of money each money to buy stocks

Big Risk, Big Reward

• Morgan keeps a large portion of his portfolio in cash (about 20%) to avoid huge swings in his net worth: “I don’t manage my money to achieve the highest returns, I manage my money to get the best night of sleep” – Morgan Housel
  • “It’s exchanging the opportunity to make a killing in exchange for making sure you don’t get killed”
• If you aren’t willing to lose 50% of your money, you don’t deserve 20%+ gains
  • Link to Morgan’s tweet about how Charlie Munger deals with huge loses
    • Snippet: “If you’re not willing to react with equanimity to a market price decline of 50%…you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get.”
• “If you want to earn 10% a year on your money over the long haul, you need to put up with the fact that every couple years you might lose 20, 30, or 50% of it for a somewhat short period of time. That’s the price of admissions to the markets.” – Morgan Housel
  • The biggest stock market risk is always the thing that no one saw coming

When Will The Market Stabilize & Recover?

• “Not a single person knows what will happen next…it’s possible that we way overreacted, that’s possible. It’s possible that we’ve barely scratched the surface.” – Morgan Housel
• One sign of market stability is seeing minor increases and decreases in the market instead of huge swings
• The stock market’s crash isn’t due to economics, it’s due to biology
  • In 2008, the concern was losing your job. In 2020, the concern is getting sick and dying.
    • If a vaccine is created soon, the market has the potential to rebound rapidly

Dealing With The Coronavirus

• To combat the spread of the virus, China took their medicine early and lockdown ~50 million people almost overnight
  • “That’s going to be the biggest economic hit because everything just came to a stop” – Morgan Housel
    • Gambling revenue in Macau and car sales are both down 90% month-over-month
      • The good news is that since China shut everything down, they contained the spread of the virus and are now in the process of restarting their economy
• A total lockdown in the US isn’t likely so it may take longer to restart the economy
  • “The short-term hit that we might take might be less, but I have a feeling it’s just going to be a much more dragged out process to both experience the downturn and then a slowness in the recovery afterwards” – Morgan Housel

Making Productive Use of Time at Home

• If you’re quarantined at home, instead of sitting around doing nothing:
  • Read books
  • Buy a Kindle
  • Listen to podcasts
  • Learn a musical instrument
  • Get an Audible subscription
  • Spend more time with your children
  • Buy dumbbells and workout at home
  • Do some home decorating or improvement

Additional Notes

• Choice is important–Going camping is fun, being homeless isn’t
• The coronavirus is uniting the world: Countries around the globe are working together to help one another out
• History doesn’t crawl, it leaps–The biggest events happen overnight