Bet on COVID-19

[BikeLover]

Having come to the conclusion this weekend that COVID-19 is widely not being taken seriously enough, in particular, the length of time that we'll likely have to practice strict social distancing, and that the USA is dealing particularly poorly with it, I decided to reduce exposure to equities, particularly US equities.

The decision was not based on any particular market moves; I made the decision before news of the drop in stock futures for Monday, and did not refrain after seeing the 10% drop.

I sold VT and VTI to reduce exposure to US equities, am now 15% US, 35% international, and 50% cash.

I will re-balance upon deviance of 10% from the desired weighting (so if stocks drop and the cash becomes 55%, will purchase more stocks to make it 50%, if they rise and it becomes 45%, will sell stocks).

Getting back in
My plan is to move to 80% equities as
1 the seriousness of the disease has become evident, e.g.,
 a. hospitals are overloaded in the US (and Germany, France, U.K.) and patients in critical condition are turned away, or
 b. social distancing measures such as closing schools, cancelling large events, etc. are predicted to be mandated into the fall term,
or similar measures that are necessary in order, prior to development of an effective vaccine,

2 or when a long-term solution has been achieved, e.g.,:
 a. An effective vaccine is expected to be available in the next few months, or
 b. An instant, easy to use and readily available test for COVID-19 is widely distributed,

3 or when it is clear that it will become endemic like the common cold and flu;

In the former case, I expect equities to drop in value. However, if they do not, I will assume the market had already taken into account the likelihood of this development, and will move to 80% nonetheless. In the second case, I expect equities to rise, and will have lost out on potential gains. In the third case, I really don't know what to expect.

While I may move gradually towards 80% equities, at the latest I will do so when a month goes by without COVID-19 being in the main-stream mass media.

To be honest, this is one bet I really hope to lose, in the event that markets drop after bad news about the spreading of SARS-CoV-2, the financial benefit will be something like a consolation prize.

[Guizmo]

My head hurts. Am I feeling sick or do I just have a case of the market timers?

[dougules]

Why?  Please don't get caught up in the panic and the greed. 

[magnet18]

Would love to see you turn this to a case study and post up balances (scaled) and buy/sell prices and dates, to find out how it works out.  Statistically you're playing a losing game but you could theoretically come out ahead.


FWIW, Warren buffets 2 rules:
1. Don't lose money
2. Don't lose money

You already violated rule 1 by selling low

Try not to violate rule 2 by buying high.  Best of luck to you. 

[Stimpy]

"To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework."

- Warren Buffett

also

"Be Fearful When Others Are Greedy and Greedy When Others Are Fearful"

- Warren Buffett



So ask your self a question or 2.   Is what your doing part of a sound intellectual framework for making decisions?  Ie Can it be used outside the current fun times and be proven to be correct over and over again? 

Is it being fearful or greedy?  And is that what the masses are doing?  Cause, at least as far as stock are concerned, probably a bad idea to be following the masses.

[DaKini]

Here in Germany we are certain it will become endemic.
All the measures are just to delay the spread, so we have not too much critical patients overflowing our intensive care bed numbers.
60-70 percent of the population will subscribe the virus, but it’s the timeframe that matters: we try to stretch it to a year or two, so all critical cases can be handled by our health care system.

The 60/70 percent number is btw based on natural herd immunity, it’s the number where the virus can infect only one more person or less on average which will severely slow the spread.

I wish you all of luck in the states with your president and health system.

[MustacheAndaHalf]

I'm doing something similar, but started a week ago.  Would you make the bet if stocks had already dropped -40%?  I suspect the answer is no, because context matters.  You need to consider your bet in the context of existing losses.

The past 4 weeks, U.S. stocks dropped -20%, and with today's -9% loss, that's almost -30% in a month.  Given losses of -30%, can you accurately predict additional losses?

Warren Buffet also says you can wait as long as you want, until you get a pitch you like.  He means skip a bad deal.  If tomorrow markets rebound +5%, would you place your bet in the context of -25% of losses in the past 4 weeks?

[BikeLover]

https://arstechnica.com/science/2020/03/test-test-test-who-says-as-us-flounders-with-covid-19-response/

“We don’t want everybody taking this test. It’s totally unnecessary,” President Trump said in a press briefing Friday.

That's just one of many examples of the situation with the virus not being taken seriously enough.

Certainly it's possible that the financial markets have adequately priced in the bumbling of politicians. That is one reason why I only bet 50%, as it where. And if the market had dropped much more, I would have assumed that it was already priced in.

[BikeLover]

The WP post now has an article making the same prediction about the length of the pandemic and about hospital beds:

So it’s possible, even most likely, that after U.S. cases peak, Americans will still have to maintain some measures — such as isolating the infected, constant hand-washing, some degree of social distancing — until a viable vaccine is developed, which could take 12 to 18 months.
...
Even with the action being taken now in the United States, experts say hospitals will most likely run out of beds and ventilators and be forced to ration care, choosing which patients to save and which to let die.

https://www.washingtonpost.com/health/2020/03/16/social-distancing-coronavirus/

[MaaS]

It might work - but this trade is risky.

The information was available to make this sort of move 2-3+ weeks ago. At that time, reducing a little exposure was a better bet, IMO. I did this and put it back in the market yesterday.

If there is any real progress in the drug trials currently occurring the market could go up 20% in a few minutes.

Like 10000 people storming into Costco for toilet paper all at once.

[MustacheAndaHalf]

If there is any real progress in the drug trials currently occurring the market could go up 20% in a few minutes.

By drugs, do you mean those which treat, cure, or vaccinate?
There are very different time frames for different types.

[TheAnonOne]

By the time we "know how bad it will be" the market will have bottomed previous to that point. The "unknown" is what drives the prices down. This is a losing strategy from minute 1. Good luck.

[BikeLover]

By the time we "know how bad it will be" the market will have bottomed previous to that point. The "unknown" is what drives the prices down. This is a losing strategy from minute 1. Good luck.

No, the possibility of it being "so bad" in buyers and sellers pushes the price down, but not as much as the certainty of it being "that bad" pushes it down.

For example, let's say everyone recognizes a 50% of an event in the next year that is expected, if it occurs, to reduce GDP by 30% for the next ten years (e.g., some tiny asteroid that has a 50% of hitting the earth and wreaking havoc but not destroying humanity, or some other catastrophal event). Hedging against this risk will reduce the prices of stocks by somewhere in the vicinity of 50% of the potential loss of future discounted earnings, in comparison with the value of stocks before the possibility of this event was recognized.

Now, if the event occurs, the stocks will drop to account for the general certainty of the loss in future discounted earnings. If the event does not occur, the stocks will rise.

The drop in the value of stocks to account for the 50% risk, is more or less equal to 50% of the drop in the value of stocks that will take place if the event one is worried about happening, actually happens.

[BikeLover]

My original plan as stated was to move to 80% equities as
1 the seriousness of the disease has become evident, e.g.,
 a. hospitals are overloaded in the US (and Germany, France, U.K.) and patients in critical condition are turned away, or
 b. social distancing measures such as closing schools, cancelling large events, etc. are predicted to be mandated into the fall term,
or similar measures that are necessary prior to development of an effective vaccine,

While 1a hasn't happened yet, both 1a and 1b are starting to be more generally predicted, so I just rebalanced at 14:35 EST and also moved to 65% equities (25% US, 40% non-US), 35% cash.

I still don't see it being taken as seriously as I expect it will be in the next few weeks, which is why I'm not still not in at 80% equities, to be able to take advantage of the likely move downward as the situation becomes more serious and more people panic. On the other hand, to address the previous comment about the riskiness of the situation, I am indeed not in a position to judge the chance that an effective treatment or even vaccine will be available quicker than expected, so have already moved somewhat towards stocks.

[vand]

By the time we "know how bad it will be" the market will have bottomed previous to that point. The "unknown" is what drives the prices down. This is a losing strategy from minute 1. Good luck.

^ At last. Someone who understands how the market works...

[BikeLover]

On Monday, March 23, between I've again rebalanced and moved to 80% stocks: 35% US, 45% non-US, 20% cash.

Seeing as stock prices have moved down as the predictions have gotten more dire, I've now moved back to 80% stocks. Will be retaining the 20% cash for a while to be able to take advantage of further downward movement.

So, to summarize my moves so far:

Before beginning the bet, portfolio was 65% US-stocks, 35% non-US stocks.
Rebalanced on March 16, 2020 to 15% US stocks, 35% non-US, 50% cash on March 16, 2020 (VTI at 121,51, VXUS at 37.44, VWO at 30.08)
Rebalanced on March 18, 2020 to 25% US stocks, 40% non-US, 35% cash on March 18, 2020 (VTI at 114,48, VXUS at 36.76, VWO at 31.79)
Rebalanced on March 23, 2020 to 35% US stocks, 45% non-US, 20% cash on March 23, 2020 (VTI at 110,80, VXUS at 36.63, VWO at 30.40)

[BikeLover]

Would love to see you turn this to a case study and post up balances (scaled) and buy/sell prices and dates, to find out how it works out.  Statistically you're playing a losing game but you could theoretically come out ahead.


FWIW, Warren buffets 2 rules:
1. Don't lose money
2. Don't lose money

You already violated rule 1 by selling low

Try not to violate rule 2 by buying high.  Best of luck to you.

Those two rules can be interpreted in a number of ways. At any rate, selling at a particular "low" point only implies losing money if you have some reason to take as your reference point a particular higher point. Otherwise, as long as your basis is lower than your selling point, you are not losing money, but locking in gains. Admittedly, if you stay out of the market for a period after that, you are risking missing out on future gains that you could have had by staying in.

Out of curiosity, I just analyzed my portfolio from beginning of January 2017 (when I really begin investing) through March 23, 2020. The current value is 1% less than the sum value of all deposits, which I've made more or less monthly.

According to the calculator at https://dqydj.com/etf-return-calculator/
investing 100% in VTI, making monthly deposits and reinvesting dividends, the ending value on March 17,2020 would be 6% less than the sum value of all deposits. The calculator won't calculate the value for dates after March 17, 2020. But seeing as VTI closed around 11% lower on March 23, 2020 than on
March 17, 2020, the result would be even worse, about 16% less than the sum value of all deposits.