Forgive me for the clickbait-ish title. Despite what it says, the topics I would like to highlight are irrational behavior in financial markets and a quick analysis of the coronavirus situation. This is not another prediction of a 2020 market crash.
It has been on the news lately, the coronavirus also known as the Wuhan virus is a newly identified virus that started spreading in Wuhan, China and has now spread to several other countries including US, Japan, Taiwan, Hong Kong, South Korea, Thailand, and Singapore.
Recent news of increased deathtoll (It is currently 41 deaths as of 25 Jan) and second confirmed case in US had not slipped investors’ attention. The market experienced its biggest one-day loss since Oct 8 on Friday and my portfolio took a dip.
Latest Update as per 30 Jan:
But markets will go back up eventually. So I am not too worried.
Outbreak Panic
The idea of a possible pandemic is really something scary. Especially since my family just recovered from a bout of influenza during December last year. It was not a pleasant experience.
I do not want to go through anything similar again. I live in one of those countries which the outbreak had reached.
It was on the news lately but the reality had not hit me until Friday. I was at the mall with my family and we noticed a higher than usual number of people wearing surgical masks.
At first I thought: Is this Hong Kong? Why were they in masks?
After that, I stepped into a lift full of tourists from China, then it hit me – people are reacting to the virus outbreak news.
Suddenly I heard a cough. Thoughts began to fill my head. Well, so far there were only two confirmed cases in my country. What if there was a cover up by the government? What if the numbers were actually larger?
This felt like one of the zombie apocalypse movie – Newly discovered fast mutating virus that is spreading rapidly. My imaginations suddenly ran wild.
Then I felt panic. I need to do something. That’s it! I need to get masks for my family.
After rushing to the nearest retail pharmacy, I found out that the surgical masks were all sold out. Really? Luckily, there was another pharmacy in the same mall. Again, the second shop was also all sold out.
This prompted me to google online and as I had feared – all surgical masks supplies were sold out nationwide. I am not kidding, it really was on the news.
Clearly, people had panicked and rushed out to stock up on masks.
I do agree with the people on this: health is the most important – portfolio and markets can wait. So even if it is a slight chance, we have to prepare thoroughly to prevent it.
Overreaction
If you remembered year 2019 as I did, it was quite a scary year. On hindsight, we know 2019 was a great year and the markets reached records high.
However, I do remember how the markets reacted to every tweet from Trump. How it flip-flopped up and down depending on what he tweeted on the China trade deal.
Investors heavily reacting to news can result in selling or buying at prices than is no longer based on fundamentals but on fears or greed. This is referred to as overreaction.
An asset bubble is a situation where the price of an asset is inflated to a level which it is no longer based on the underlying value of the asset. In other terms, it is overpriced.
Asset bubbles are often the result of this irrational behavior – greed. On the other hand, market crashes are often the result of fear.
This is actually a common bias that we have and discussing all these human bias will require another long post for another time.
So how should we deal with this irrational behavior?
Be Calm. Slow Down. Gather More Information.
In the book thinking, fast and slow, Daniel Kahneman introduced two kinds of system of thking: system 1 and system 2
During the talk Kahneman offered his take on how the mind processes information in two distinct ways. “System 1,” he explained, is the brain’s fast, automatic, intuitive approach. “System 2,” he said, refers to the mind’s slower, analytical mode, where reason dominates. But the first often dictates the second.
news.harvard.edu
When faced with new information, we quickly process it and want to react immediately. That is often system 1.
If we slowed down, look at the new piece of information objectively with all the other information that we already know and piece it together.
Then, we can take appropriate actions and better handle the situation.
Going back to the coronavirus case, what makes it a pandemic is how easily transmittable it is from humans to humans and how deadly is the virus
In order for this virus, or any, to lead to a pandemic in humans, it needs to do three things: efficiently infect humans, replicate in humans and then spread easily among humans, Live Science previously reported. Right now, the CDC is saying this virus passes between humans in a limited manner, but they are still investigating.
livescience.com
How Infectious is it?
Around 1000 cases had been reported in China so far and 41 deaths where 3 is outside of Wuhan. Globally it is estimated to 4000.
The virus is primarily transmitted from animals to humans. But new cases had shown that it does transmit from humans to humans
Travel restrictions have been placed on China. Many countries and also imposing restrictions and quaranteeing suspected and confirmed cases. This should help limit the spread.
How Deadly is it?
We still do not know how deadly the virus is. Many who were killed by the coronavirus so far have been older men, who were already in poor health. The youngest fatality disclosed so far was 36 years old.
How Should We React?
Whether it is a pandemic or not, we really do not know at this point. Until we gather more information and more data points, only we can draw a better conclusion.
Until then, we should just follow the precautions, trust the authorities and medical professionals to contain the disease and wait for new information.
Refer to this article by the CDC on more prevention information.
If you feel sick please seek medical attention immediately and avoid going to public places.
If you are healthy, keep calm. Wear a mask. Practice good hygiene. Avoid crowds and traveling.
Similarly, if you read of any good or bad news that may affect the financial markets, slow down and wait for more information.
Happy Lunar new year
Fatty's Finance 