Foresight Is Blind — Money Lessons I Learned In 2020
Focus on the consequences rather than probability
When the virus began spreading, I never expected it to become a full-blown pandemic. I like thinking about that moment because I was so wrong about it. To be clear, I never underestimated the severity of the virus; I simply didn't expect it to blow up. I knew people were irrational, but I never expected them to be this foolish. It's almost comical.
"Nah that's dumb. No one would do that."
"Why would you go in there after everything that happened?"
These were once comments I've made while watching zombie outbreak or scary movies, but they apply to real-life Americans in 2020. Earlier in the year, some investors wrote off the virus as if it were the common flu. In retrospect, I think it was the easiest way to cope with the newfound risk of capital loss. If the virus turned out to be more potent than the common flu, investors would have had to deal with change. Change is hard, so it was easier to assume that the virus was milder than it was in reality. This was a mistake. The easiest answer often isn't the correct one.
It's fair to hope the virus won't be as bad as it seems, but it's dangerous to ignore the risks associated with it. As a rule of thumb, assume anything can happen, no matter how improbable they are. The sheer scope of events that could occur, the likelihood of them occurring, and when they could occur is infinite. Don't waste your time trying to figure everything out. Instead, it would be best if you focused on the consequences of those known events. Instead of writing off the virus, investors should have asked about how it would affect their portfolios if it turned out to be worse than we knew initially.
When the epidemic hit, investors had a couple of options. They could...
- downplay the severity of the virus, and aggressively buy the first few dips (can we even call them that?)
- panic, and sell everything
- be truly passive and invest as usual
- hedge, and prepare for the worst
- (insert more here)
Missing a train is only painful if you run after it! — Nassim Nicholas Taleb
Of everything an investor could have done, being passive was the best way to avoid regret. Those who took action took responsibility and were thereby more sensitive to outcomes. Those who bought the initial dips aggressively didn't perform well, but they did better than those who sold everything for a loss. You could argue that the latter group gained some peace of mind by not having to ride the rollercoaster. You could also say that they had it worse because they got to see what could have been if they didn't panic. I think that the real winners are those that took the time to understand what was going, picked a path, and stuck with it.
Be prepared, no matter what
A buy & hold, dollar cost averaging index fund investing strategy is excellent. It is the way to go if you truly don't mind market returns and don't want to worry about making mistakes. I won't knock it anytime soon as it's a simple and sure way to get results given some amount of time. With that said, understanding market cycles is superior when you're right, and sometimes even when you're wrong. Switching between offense and defense is the way to go if you can weather the eventual storms and remain consistent. It's not about selling when there's danger and buying when we're in the clear. Instead, it's about allocating capital where you think you'll get the most risk-adjusted returns, and sometimes, that means being short. For me, 2020 was one of those times.
I started betting against retail companies in mid-January. My thesis was around how slow these companies were at transitioning to e-commerce. I bet that they'd lose a lot more market share to e-commerce giants in 2020 and beyond. I laugh every time I think about it because none of my planning had to do with the virus, but the virus ended up accelerating my concerns for brick and mortar retail companies. My worst-case scenario for the bet was that it would serve as a hedge even if the entire market suffered.
Though I didn't see the virus coming, it happened. And though I did not think it would become a pandemic, it did. I was wrong...twice, but I was ready. Before 2020, I thought the best part of hedging was that it made money when everything else didn't, and I was wrong again. The most important benefit of the bet turned out to be the clarity of thought that came with the peace of mind it created.
Staying calm was easy when each additional red day resulted in even more profits. It was easy to see what was happening when other investors were panicking. At some point in March, valuations felt too low. My option contracts started getting filled at ridiculously low limit prices. I realized that I was buying dollars for mere pennies. I usually don't have cash lying around to buy dips, but this time around, the dip itself created the cash. None of it would have happened if I wasn't prepared.
There was a lot of uncertainty when I was planning, and there was even more luck in the outcome. Besides being short retail, shorting hospitality or going long on stay-at-home stocks would have produced better results. But the latter category didn't exist before 2020, and doing the former meant that you had god-like insight into the future. The point here is that we'll never know what the future holds, but we have to be prepared. You obviously can't plan for everything that could happen, and sometimes the best plan is inaction. Being prepared is idiosyncratic. But you need to be aware of what it means to you.
Now, how are you preparing for 2021 and beyond?
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