Even though it was more of the same, the second year of COVID shows investors the way forward
06-Jan-2022 •Dhirendra Kumar
A year ago, I started this page with 'The year of the Chinese virus has ended'. At that time, implicit in my statement was the idea that not just the year but COVID itself had more or less ended. Well, another year has gone by, and here we are again. So I could very well start this page with a somewhat depressing version for this year: The second year of COVID-19 has ended.
However, that was then, and this is now. Even though 2021 has had a different course as far as the disease itself goes, our understanding of what the virus means for businesses and economies has moved forward quite a bit from where it was during 2020. Early in the pandemic, the dominant view was that this was a China problem. Goldman Sachs famously said in the first week of February 2020 that the impact on global growth would only be a 'modest hit to annual-average global GDP' of 0.1 per cent to 0.2 per cent. And as far as businesses were concerned, the impact would be limited to those who had direct exposure to China. They were indeed not alone in such predictions at that stage.
Pretty soon, the pendulum swung hard to the other extreme. The official wisdom became that the sky was falling, and businesses and economies would be destroyed and would stay in deep distress for years to come. As it turned out, this view was just as mistaken as the original one. For many reasons that most people have figured out by now, even something on the scale of this pandemic does not have the power to make sudden massive changes on a global scale in the juggernaut of an economic system that is composed of billions of people living their daily lives. Things divert from the mean but then snap back quicker than anyone expected initially. That's not to say that nothing can ever have that kind of an impact, but it isn't this one.
As time has passed since COVID began, this pattern of predictions over and undershooting has repeated quite often, not just about economies and businesses but about the virus and vaccines themselves. We have had a two-year parade of experts making predictions about everything, being wrong and then scrambling to make new predictions. The only predictable thing has been the erosion of their authority in the process. While it's not my job on this page to discuss more significant issues, it does bring to mind a (probably apocryphal) Einstein quote, "Insanity is doing the same thing over and over again and expecting different results."
The worst idea in investing is to try to do frontrunning of the event cycle, and COVID has shown that beyond any doubt. Anyone who did this consistently since February 2020 would have had a bad time both coming and going, meaning lost money on the way down and missed opportunities on the way up. Not just February 2020, the front running of events and news is always a bad idea. Why? Because its main idea is that you need to predict correctly to make money, and if you cannot do so, you must not be expecting hard enough. This is nonsense, but unfortunately, it is very insidious nonsense, and most of us internalise it to at least some degree.
As the stock markets gyrate to higher, then lower and then yet more elevated levels, there is no shortage of people frantically trying to figure out what will happen. I can tell them two things with certainty. In the future, there will be a time when the market is higher than today and a time when it's lower. That's a perfect prediction, and of course, it's a useless one, so let me make a useful one: investors who stick to the basics without getting too excited or too depressed will always do well. That should be a simple formula to follow.