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Coronavirus, The Long Game, and Andy Dufresne - Episode 16

In this week's episode of Retire Your Way Radio, I talk about how to assess the possible impact of the coronavirus (or any future pandemic) on your investment portfolio. I also use the story of Andy Dufresne from Shawshank Redemption as a great example of playing the long game. 

There’s been some volatility lately even though we are hovering around all-time highs in the markets, but with the coronavirus, the ups & downs with the tariff wars, and no one knowing what is going to happen with interest rates, it can create some uncertainty, and usually uncertainty equals volatility in the markets.

I’m sure you’ve heard the phrase “playing the long game.”  The tortoise and the hare; the marathoner vs. the sprinter; and the fast, big engine, gas guzzler vs. the smaller, more fuel-efficient, cross-country vehicle are some examples.

Listen to Episode 16 Here:


You can listen online through the direct player above, or a much easier way to listen is by subscribing to the podcast through a free podcast app on your phone.  The podcast is available on iTunes, Spotify, Google Play Music, iHeartRadio, and Stitcher


Shawshank Redemption (spoiler alert)

When I think of playing the long game, the ultimate movie example I think of, is Andy Dufresne. That name may ring a bell for a few of you. In Stephen King’s book and later film, The Shawshank Redemption, for over 19 years, Andy Dufresne used his rock hammer to tunnel through the wall in his prison cell at Shawshank State Penitentiary while concealing the hole with a poster, (it was Rita Hayworth in the book and Raquel Welch in the film).  

Meanwhile, he had also created the identity Randall Stephens as a shield from the money laundering activities he was performing for the warden.  

After deciding he’d had enough, he plotted and executed the final steps of his colorful escape.  He assumed the identity of Randall Stephens and withdrew the money that he had laundered and hid for the crooked warden.  

He then sent evidence to the authorities of the warden and his guards’ nefarious activities.  And then Andy (now Randall Stephens) escaped to Mexico with the money, and the warden took his own life.  

This is an ultimate story of playing the long game, and also revenge.

3 Ways to Assess the Impact of the Coronavirus

The question everybody seems to be asking these days is: How will the coronavirus affect my investment portfolio?  

As is with most events, we have no idea. Again, there are too many unknowns. The virus is now up to more than 70,000 cases and almost 1,800 fatalities—and counting.  But nobody knows whether the virus will eventually run rampant across the Chinese economy or burn itself out.  

Nobody knows if it will spread widely beyond China and become a global crisis or remain largely confined in China. Either way, it’s hard to predict the impact of the virus on the Chinese or global economy, much less how it will affect the U.S. and global stock markets.

There are essentially three different ways to guess the impact of this latest pandemic.  

1. Look at how markets responded to past scares.

The first and easiest is to look at how U.S. and world markets responded to past health scares. When the public became aware of the SARS epidemic (a previous strain of the coronavirus) back in 2003, the S&P 500 index fell 14% over the subsequent two months, from mid-January to mid-March.  

But, according to a historical look-back by the MarketWatch economists, the market was up over 20% a year later.  

The Avian flu outbreak in 2006, the Swine flu outbreak in 2009, the Ebola outbreak in 2014, and the Zika epidemic in 2016 saw initial downturns between 5.5% and 7%, but a year later, the markets had recovered by between 10 and 36 percent.

A month ago the S&P 500 index fell 3% in the two weeks after January 17, when the coronavirus outbreak first made headlines. Since then, the index has bounced back to all-time highs.

2. Assess the impact on the Chinese economy.

The second is to assess the impact that the coronavirus outbreak is having on the Chinese economy. While Chinese stocks are seldom a major part of U.S. investment portfolios, they can certainly affect the world economy through disrupted supply chains and reduced demand for products and services sold by outside firms.

China now makes up 15.5% of the global economy. It is a major purchaser of commodities like oil and agricultural products, and companies as diverse as smartphone makers and auto companies rely on its manufacturing output.

The Chinese government is trying to contain the spread of the virus by imposing severe travel restrictions and by forcing 50 million people in affected areas to remain in their homes—which, of course, means they are not going to work and not being productive.  

At the same time, however, the Chinese government is pumping liquidity into its economy—an estimated 1.7 trillion yuan from the People’s Bank of China—in order to contain the economic damage it is causing with the quarantine measures. Will the two balance each other out?  

We can note that the SARS epidemic caused a temporary 2.4% decline in Chinese production. Nobody knows if the new epidemic will have the same, greater or lesser impact.

3. Focus on individual companies that are affected. 

The third way to evaluate the potential damage of the pandemic is to focus on certain individual companies that are being affected by the initial phase of the outbreak.  A recent U.S. News & World Report analysis singled out Carnival Corp., whose Diamond Princess cruise ship is currently quarantined at a dock just off the Japanese coastline—with 3,600 passengers onboard.  More than 450 of them have come down with the coronavirus, which means that this single ship has more cases than any individual country besides China. Carnival stock is down about 17% since mid-January.

The article also mentions Wynn Resorts, which has major holdings in China’s gambling Mecca of Macao. The company’s Macao resorts have been shut down by the Chinese government, causing Wynn to lose $2.6 million per day. The stock is down roughly 15% from its peak.

Next we have Yum China Holdings, the parent company of the KFC, Pizza Hut, and Taco Bell brands in China. The $20 billion company has had to shut down its China-based locations, and the stock has lost 15% of its market value this year.

Finally we look at, Nike, who has closed half of its company-owned stores and stores managed by partners in China. About 17% of the company’s revenues come from China, and Chinese factories produce about 20% of Nike products. Nike’s stock doesn’t seem to have been hammered like the other companies on this list, but you can expect a reported decline in earnings this quarter.

So what does this mean?  Anybody who tells you that they know how the coronavirus epidemic will play out in American household portfolios might as well be selling snake oil. We simply don’t know. But so far, history suggests that the market reactions to past pandemics have been temporary, just like all other kinds of market downturns.

Since we don’t know when to get out and back into the markets, we won’t be playing the market timing game.

The Long Game in Financial Planning

Playing the long game is key when it comes to financial planning and investment management.  

In his blog, A Wealth of Common Sense, Ben Carlson illustrates historical returns of the S&P 500 from 1926-2018. His illustration shows a 54% chance of a positive return of the market daily (about a 50/50 chance of being up or down).  

As you take a longer-term view, it shows a 69% chance of positive returns on a quarterly basis, 88% chance of being positive on a 5-year basis, and a 100% chance of being positive over a 20-year time frame.      

Even though we never know for sure what the future will bring, when I emphasize focusing on the long term, you’ll understand why.

The Shawshank Redemption is a classic, so I’m sure most of you have seen it. What pops into your mind when you think about playing the long game?  

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