Tend Your Own Garden

Most talk of what to do with your investments is the equivalent of rearranging deck chairs on the Titanic. The real issue is the hole in the ship.

What may turn out to be the largest human event since World War II is unfolding. Whatever history decides on its scale, what we experience will be, at once, horrible, deadly, overwhelming, amazing and inspiring. But first it will be incomprehensible.

What we all need to grasp

Understanding what’s happening isn’t easy. Our minds aren’t geared to upheavals or major changes. In the course of the first OPEC embargo (1973-74), for instance, stocks fell dramatically as gasoline and heating oil shortages threatened all economic activity.

And everything declined, with stocks on the over-the-counter market virtually disappearing. Adjusted for inflation, for instance, small-cap stocks fell 41.7 percent in 1973 and an additional 35.1 percent in 1974. (It’s important to use an inflation-adjusted figure because inflation was 8.7 percent in 1973 and 12.3 percent in 1974.)

As an investor back then I found it difficult to think about financial markets while hunting for dead tree branches to help heat the house and wondering if I’d ever be able to fill the gas tank again.

Jobs were lost. The automobile industry was on the rocks. Public and private pensions were threatened. Social Security funding started to look iffy. Institutions broke contracts. Construction work in progress came to a halt.

People you’d think were invulnerable went under. A summer neighbor who had provided the yellow Rolls-Royce used in filming Robert Redford’s version of “The Great Gatsby” went bankrupt. The car was auctioned. His waterfront house foreclosed.

What we’re now experiencing will be tougher

It’s a good bet that the coronavirus will be a bigger event than 1973-74 because it’s not just about oil prices. It’s about life and death. Rather than listen to the talking heads on TV, I suggest investing an hour and doing a patient read of two articles by Tomas Pueyo on www.medium.com.  The advertising-free website costs $50 a year or $5 a month and is an endless source of smart essays on every topic imaginable. I’ve accessed the articles without charge by pasting the full URL into my browser.

* Pueyo’s article posted on March 10 is about the tools used for measuring the number of cases and how the spread can be reduced. Read it here.

* His second piece, published March 19, looks further ahead and shows how social distancing and other tools can work to reduce the death toll and devastation of our healthcare system. Read it here.

* If you don’t want to sign up for Medium, you can watch an excellent discussion of Pueyo’s figures from the Khan Academy on YouTube here or by searching on YouTube for “Khan Academy Pueyo.”

The articles lay out the dynamics of the epidemic, the danger of virus mutation, and the limited, but effective, means we have to fight it. At last count, 40 million people had read the first article. It’s evidence-based but subject to variance. Some qualified observers, for instance, believe that mutations tend to dampen out future infection spread. Others fear that unending mutations could bring still more dangerous versions of the virus. Let’s hope it’s not as bad as the models suggest.

Either way, the path to broad immunity and a semblance of normal is looking more like an 18-month trek than a two week “staycation.” Meanwhile, stocks and economic activity continue to be unstable.

Spillover effects

In our tightly connected world, everything that affects one thing has an effect on everything else. The entire oil industry is now selling at fractions of book value as the industry faces circumstances that make the mid 1980s oil bust look like the Good Old Days. Yet in late 1985 I remember Preston Road in Dallas lined with cars distressed owners hoped to sell. Home foreclosures followed and became commonplace.

CalPERS, the California Public Employees Retirement System, is more visible than most pension plans. We now know that it lost $69 billion of its record $404 billion in assets as of March 22. We can expect similar stories about a multitude of public and private pension plans all around the country in coming months.

And what about Social Security? Well, we won’t see anything scary in the report due out soon, but you can be sure that next year’s report will move the date for the trust fund being gone a lot closer than the current 2035.

We’re talking about a systemic event here, not a local disaster story.

What to do while you’re traveling to Mars

Let’s clear our heads with a thought exercise. You’ve just learned that you’ve been selected for the first Mars mission. You’ll be leaving Earth and won’t be returning for at least three years.

How do you invest your money while you’re away? You can’t make changes and you can’t put anyone else in charge.

That’s a difficult problem.

So, let’s look at what history tells us.

One thing we know for certain is that time has never been kind to cash. Regardless of the form of government, the century or location in the world, the stuff we use for transactions, cash and near cash, loses purchasing power. Ditto bonds. They seldom earn enough interest to protect purchasing power.

Yet we’ll be needing cash the moment we return. So, we grit our teeth, accept that we’ll be losing purchasing power and keep a significant part of our assets in relatively short-term fixed-income investments. How much depends on the amount of cash you expect to need when you return.

You also know that while you might feel better entrusting your money to a fabled guru or fascinating entrails reader, most will be wrong because we face a future of unseen butterfly effects and unexpected consequences.

What to do?  Choose both. Split your money between domestic fixed income and the entire domestic stock market, something I call the Couch Potato portfolio. A global pandemic isn’t about making the perfect market call or stock pick. It’s about surviving.

Tend your own garden

The spread of the virus depends more on our collective behavior than on anything governments can do.  There’s a big lesson in that.  We must be the prime movers in protecting ourselves, our families and our friends.

Here are five meaningful actions:

• Reduce your overhead expenses. This means looking at where you spend your money and deciding what’s useful and necessary and what’s not. Some readers will say that’s entirely obvious. True, but I have always been amazed at how little the vast majority of people know about where they spend their money. Now is the time to get to know it well.
• Reduce your debt. The most common source of problems for people and companies is owing too much money. If you can, pay off as much as possible with an eye to debt reductions that have the biggest impact on your monthly payments.
• Think Swiss Family Robinson, not Doomsday Prepper. While it’s popular to catastrophize, it’s a lot more productive to put effort into projects that will help you replace at least some of the goods and services we take for granted. That can be a simple as learning to cook or as complicated as starting a home garden. Some will pooh-pooh this as silly, but the benefit of taking positive action is good for your head.
• Take care of yourself. If you’ve been putting off a slow, careful diet, this is a good time to get on it. If you’ve been promising yourself to exercise more, this is the time to do it.
• Appreciate the good stuff. One thing about them humans: They’re funny. For every shudder of fear there’s a quake of laughter. I mean, who knew how many songs could written about toilet paper? And the good stuff just starts with toilet paper songs. The serious good stuff is just beginning.

Related columns:

Scott Burns, “The simplicity manifesto,” 3/31/2019 https://scottburns.com/the-simplicity-manifesto/

Sources and References:

Tomas Pueyo, “Coronavirus: Why You Must Act Now,” 3/10/20 https://medium.com/@tomaspueyo/coronavirus-act-today-or-people-will-die-f4d3d9cd99ca

Tomas Pueyo, “The Hammer and the Dance,” 3/19/2020 https://medium.com/@tomaspueyo/coronavirus-the-hammer-and-the-dance-be9337092b56

Khan Academy, “Estimating actual new COVID-19 cases” https://www.youtube.com/watch?v=mCa0JXEwDEk

Exxon Mobil on Yahoo Finance: https://finance.yahoo.com/quote/xom/?p=xom

Wes Venteicher, “CalPERS loses $69 billion in biggest market losses since Great Recession,” 3/22/2020    https://www.sacbee.com/news/politics-government/the-state-worker/article241391841.html

Social Security website, “Summary: Actuarial Status of the Social Security Trust Funds,” April 2019    https://www.ssa.gov/policy/trust-funds-summary.html

YouTube: “my corona by chris mann”: https://www.youtube.com/watch?v=ojrtwXqqc6g

Trailer for “Swiss Family Robinson” on YouTube: https://www.youtube.com/watch?v=O3qehNT3KjY

This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Photo: Scott Burns, farmers market in downtown Santa Barbara, CA 2020

(c) Scott Burns, 2020