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At times of stress we need anchors. Pontification is not good. But it’s expected in almost every video and podcast. Let’s look instead at some of the guidance that true experts and greater minds might be giving us before we rush to vainglorious judgment of the right course of action. We’re trying to glean clues from deep expertise. I apologise if this piece therefore occasionally seems reluctant to draw definitive investment conclusions.
We’ve often cited Hans Rosling in the past. He spoke at two of our conferences. Sadly, Professor Rosling is no longer with us but his lessons seem ever more relevant amidst the coronavirus of 2020. He cited a pandemic as the first on his list of fears that might interrupt quiet progress. He spent much of his career as an epidemiologist. He grasped the mathematics of exponential growth. Moreover he translated theoretical knowledge into action in a remarkable manner.
“Statistics can be terrifying ... I saw a line on a graph that gripped me with fear. I had been concerned about the Ebola outbreak ... But in my work, I often heard about sudden outbreaks of deadly diseases, and I had assumed it was like most others and would soon be contained. The graph in the World Health Organization research shocked me into fear and then action... They showed, for the first time, that the number of cases was not just increasing along a straight line: 1, 2, 3, 4, 5. Instead the number was doubling like this: 1, 2, 4, 8, 16. Each infected person was infecting, on average, two more people before dying. As a result, the number of new cases per day was doubling every three weeks ...Within only nine weeks (the time needed for three doublings) the situation would be eight times as desperate. Every three-week delay in dealing with the problem would mean twice as many people infected and twice as many resources needed.” (Factfulness p74-6)
But Rosling was no academic theoretician. He cancelled all his assignments and flew to Liberia. He stayed over Christmas and the New Year. It’s possible his actions shortened his life. They certainly shortened the Ebola outbreak.
Liberian Red Cross team in Monrovia, Liberia.
© NurPhoto/Getty Images.
Apart from inspiration, what can we take from this as investors? We’ve spent much of the last decade trying to understand the dynamics and repercussions of exponential growth in a corporate setting. It’s been worthwhile. Yet we have been aware enough of the potential for malign viral growth that we think it is indulgent to label Covid-19 as a Black Swan. Sadly, it was always all too conceivable to be that.
But the central point remains. For both growth and decay we need to understand the power of doubling. We don’t see markets as being at all comfortable in handling this in either direction. One striking illustration comes from Max Levchin, co-founder of PayPal and now CEO of Affirm, a consumer finance start up. He was endeavouring to explain Elon Musk’s misjudged outburst claiming the virus was unthreatening. He said “I think it is a great illustration of how it is really, really hard for human beings to understand exponential growth. Even if you’ve been in Silicon Valley your entire life ... it’s still incredibly difficult to internalise this idea that we saw one or two infections and today we are seeing hundreds.” If Musk can’t do this then however much the pandemic seems instructive then I very much doubt markets will be able to digest this lesson.
In this context we have become increasingly concerned that negative exponential change might be the best way of thinking about climate change. It carries its own analogous, if distinct, self-reinforcing logic. Just as the more a virus spreads the more dangerous it becomes so too the more the climate changes the still worse it gets. It may not be doubling as with Ebola but it is certainly likely to be accelerating in pace and consequences. If you like it is scary progression intermediated by the hard-to-track feedback loops that complexity science describes. This means we need early information and ideas that are transformative if possible rather than just limiting damage. We’re not sure that standard ESG metrics grasp this. As with pandemics what we require is the ability to do far more than we assume to be necessary initially. Getting ahead of the curves is hard but essential.
Yet before leaving Hans Rosling he would have asked us to raise our eyes. The virus is a matter of deep seriousness. But it is also an event that captures our minds to an inevitable, traumatic, personal and immediate extent. It is the very paradigm of what Rosling termed the “negativity instinct” and the “fear instinct”. He was an observer, a rational observer, not an optimist.
But he warned us that unusual and negative events warp our minds: “if we are not extremely careful, we come to believe that the unusual is usual: that this is what the world looks like.” The investing analogy is that when dramatic, negative events occur that our time frame contracts even more than is normal. That 2020 will see disastrous earnings tests our minds but if balance sheets can cope then the value of a company is still the value of the long-term free cash flows into eternity. Without wishing to be complacent that resilience ought to be present in our holdings. Of course shocks are inevitable yet for true growth companies the appealing underlying prospects ought to survive the challenge. After all the normalised annual increase in sales, earnings and cash flows should exceed the rate at which we discount those outputs. The out years matter more not less to our portfolios than 2020.
At a time of crisis I still feel we need to try harder to observe
Before moving onto slightly more direct investment observations there’s another source that I should mention. I’m a Trustee of Johns Hopkins University and it’s been a privilege to see their response in a public health emergency. I don’t normally write about Hopkins but it seems relevant now.
The central point I want to make is that the underlying thought process at Hopkins is a long way away from that demonstrated by the investment industry. It eschews prediction. Data comes first. It is followed not by projection and forecasts but by identification and enumeration of the challenges - should circumstances move in directions plausible or improbable. It’s data-dependent not in the sense of slavishly following the most recent numbers but in the deeper meaning of willingly subjecting opinion to facts rather than imposing a thesis. It’s about thinking of the challenges and opportunities set up by this path dependence. I’d hope that we already endeavour to follow suit to some degree by thinking in terms of probabilities and outcomes rather than one central prediction. But at a time of crisis I still feel we need to try harder to observe and simultaneously be less confident in making judgments. We’ll almost certainly need to revise our presumptions in the coming months. We mustn’t make it hard to do so out of mistaken overconfidence and ego.
George Peabody Library at Johns Hopkins University.
© Archive Photos/Getty Images.
At times of crisis there’s plenty of evidence that we become preoccupied with the short term but what seems equally dangerous is that our brains are overwhelmed by angst and severe pressures so that we seek refuge in prior contentions. I’d suggest that this is particularly prevalent at present. Be it face-to-face (on Zoom), in traditional or on online media or in responding to clients there’s a real temptation to see the crisis as reinforcing whichever prior worldview is our preferred narrative. I confess to doing so – in my version Covid-19 is bound to increase the chance of Universal Healthcare finally coming to America but that’s because I want that to be the case not because it’s evidentially likely. I want it to bring more attention to inequality and climate change. People I look to for advice, such as Carlota Perez, see glimmers of hope in this direction. But she would admit that’s deep optimism speaking as much as analysis.
I would advocate that the best introductory question to ask at present is “what has the pandemic changed your mind about?” Given that it is early in the crisis and still earlier in the economic and societal reaction, let alone in the pauses needed to reflect, there should be no embarrassment in answering tentatively.