It hardly seems possible to write an Altus Insight without discussing COVID-19 and the economic destruction caused. And yet, things are still happening/changing so quickly, and we are still so bereft of data that it feels immature to discuss what exists or may exist in the future. So instead, I want to share a lesson in investing psychology that has become very real to me over the past few weeks as I have watched people’s reactions to the current situation.
First, a couple thoughts:
- My sense is that the economic fallout of the stay at home orders is going to be more dramatic than Wall Street is currently pricing. Obviously, the length of time the economy stays shut down and/or hamstrung by virus measures will affect the impact. While the stimulus enacted by the government (Paycheck Protection Program) will help small businesses cover the bills for a couple months, those months are largely months many would have otherwise been closed, and not able to transact real business. Sales pipelines have been decimated. It will take time to start that machine again; if businesses can stay in business long enough to get there.
- Unemployment is going to be higher than the numbers currently being thrown around. Many companies are holding onto employees because of the PPP loans/grants. Once that money is spent, there will be additional layoffs.
- The stock market and even broader investment opportunities are, and will become increasingly, disconnected from economic events. Stock prices might go down when economic statistics surprise to the downside, but they may also rise due to the massive quantitative easing and government stimulus.
- There will be incredible investment opportunities. We don’t know what those will look like yet. They may be in debt; they may be in equity. They will likely be in both.
- The thing I have been most disappointed about from this whole situation is how a virus got turned into a political football. Neither the Democratic nor the Republican party platforms mention anything about a pandemic response, and yet, in these days of tribalism and divide (as opposed to community and collaboration) all news has to be turned into politics. We are talking about people’s lives, livelihoods, and future lives/well-being. And while people fight about it, the evidence doesn’t support this supposed divide: analysis by CNBC indicates there is no real measurable difference between the shut-down actions of red versus blue states.
Despite my disgust around how the virus has been politicized, I want to make it very clear that I don’t think government leaders, regardless of their political party, acted in and way other than in the best interests for their constituents or the country. I may disagree with some of the decisions that were made, but from the federal government to local county governments, our governmental leaders had to make decisions with very little information in hand, in short time periods, and in an environment of great societal fear. There is no way that decisions affecting over 300 million people can be made in a way with which everyone one will agree. In the coming months and years people will look back and either criticize or support the decisions made based on their choice of statistics that will be compiled as we go through this (and as mentioned above, this will likely be done with political motivation). However, that criticism or support will be based on information that didn’t exist at the time the original decisions were being made. For the time being, lets just acknowledge that the vast majority of governors and city/county leaders are doing what they see is best based on the information they have, and the inherent biases they had when they entered this situation. For goodness sakes, even on a federal level the two parties were able to put aside their disdain for one another long enough to agree to stimulus packages in record time, and no more than normal pork barrel provisions for pet projects (though whether or not you think it is a well-constructed stimulus package is a discussion for another time).
But while I don’t feel we can criticize anyone for the decisions made to date, it also doesn’t mean we shouldn’t be consistently reviewing new information and making course corrections. It doesn’t mean that we shouldn’t be analyzing decisions that were made in the heat of the moment to learn how to make better decisions in the future.
“Begs the Question” is a fallacy in argumentation that occurs when an argument’s premise assumes the truth of the conclusion, instead of supporting it. It is a type of circular reasoning: an argument that requires that the desired conclusion be true.
It is also a powerful tool in messaging for those that hold the bullhorn. By treating the premise as unassailable truth, it creates a “no lose” situation for whomever is wanting a certain outcome. Examples of Begs the Question are around us constantly, but what makes this fallacy extra tricky is that just because someone Begs the Question, DOESN’T mean the premise is false. For example:
- Statement: Aggressive actions by the Federal Reserve and the Treasury Department in 2008 saved the world from certain economic implosion and kept the United States from ceasing to exist in its current form. We are thankful for the actions of the Federal Reserve and Treasury Department.
- Issue: The actions of the Federal Reserve may have indeed saved the world’s economy. But we don’t know that for certain because there is no other way to know what happened if they didn’t take the action that they did.
And that is the crux of the matter; a statement that is quite possibly true is treated as absolutely true.
The loudest voices around climate change use Begs the Question a little differently. In 2013 the Intergovernmental Panel on Climate Change (IPCC) released a report that they were 95% certain climate change was mostly caused by man. There is no question 95% is a high probability. I, for one, feel like a 95% likelihood of something occurring is absolutely something that should spurn action. But if you were thinking about doing a physical action that had “only” a 95% chance of survival, most of us would avoid doing that action. It follows then, that 95% is not always close to certainty. But the construction of the climate change message was done in such a manner that the loud voices could never be wrong:
- Scenario #1: The globe continues to warm – “We told you that we had big problems”
- Scenario #2: The globe starts to cool – “Look at that the great impact our actions had”
There is no room in that argument that the 5% might be true, and without acknowledging the 5%, decisions could be made that would have long term detrimental outcomes.
The danger isn’t in taking action based on the 95% probability. That makes all the sense in the world and mentioned above, I support taking action. The danger is that personal or political agendas, empowered by Begs the Question structured messaging, ignore the scientific method for the protection of pride/turf/votes/etc. Taken further, when someone with the bullhorn like Al Gore in an Inconvenient Truth use a Begs the Question approach and then backs it up with obviously manipulated data, the very argument itself (which has incredible validity and importance), is marginalized.
So how does all this relate to the novel Coronavirus and to investing?
Starting with the virus: I have consistently heard from people, and across much of the media, that shutting down society the way we did was the only option. And if we didn’t shut down, the medical impact would have been far, far worse. To be very clear, my message here isn’t to say shutting down society was the wrong decision. But it certainly was not the only option. For starters, Italy and the United States, two places with the most widespread shut down orders, are two of the countries that are the hardest hit. Countries like Sweden (where it is cold) didn’t shut down and have similar extrapolated stats as California (though not as good as the results thus far in the other Scandinavian countries that did shut down). Taiwan and South Korea (and others) with high population density didn’t shut down and have had far better medical (and economic) outcomes than the US.
The problem here is the way the argument is structured…”Just think of how bad things would have been if we hadn’t shut down”, or “Thanks to the shutdown x,y,z, has not occurred”… and how starting with the premise of the statement as true impacts decision making moving forward. If we have success with better than expected infection and mortality rates, then the shutdown is justified as the right thing to do (but what if the “expected” calculations were wrong in the first place?). If we don’t, then “think of how much worse it would have been had we not shut down” (but what if the “much worse” occurred independent of the shutdown?).
Again, the shutdown may have been the correct action (and the states that didn’t shut down may also have taken the correct action), and across the board our leaders did what they thought best. But if we structure our conversation based on the Begs the Question fallacy, we risk making decisions today and tomorrow based on the fear and lack of information from 6 weeks ago. Maybe more concerning, if we don’t take time to review the situation with an impartial eye (not for the purposes of assigning blame), we won’t learn what went right or wrong this go around to be able to improve our response for the next go around. The CDC estimates there were 80,000 deaths from the flu in the 2017/2018 flu season. Keeping people socially distanced and inside their homes would almost certainly reduce flu deaths each year. Should we do it? How many estimated deaths should enact shut down measures? Where are we (the government) getting its modeling from? Are there more accurate sources? What should we do with our supply chain to ensure ventilators and cotton swabs aren’t solely sourced to Wuhan and Northern Italy? When we see the inevitable spike in cases as states start to open back up society, how do we determine what is an acceptable increase? Etc., etc.
And this is where it all leads back to investing. In previous Insights the difference between good investment decisions and good investment returns have been discussed. Over the course of time, and across enough individual investments, good investment decisions lead to good investment returns. But any one particular good investment decision may lead to sub-optimal investment returns. Conversely, I have seen some really bad investment decisions (playing the lottery anyone?) produce excellent investment returns.
Whether as investment professionals sourcing investment opportunities for the benefit of others, or as individuals making investment decisions for our own, or own family’s investment portfolio, it is quite easy to Beg the Question to protect/build our egos.
Real time example: Because multifamily properties perform best in times of economic distress, our portfolio is doing well compared to amount of economic destruction.
The premise, stated as fact, is that multifamily properties always perform best in times of economic distress. Is it true? It certainly has validity. But is it absolutely true? Would multifamily still be outperforming other real estate product types if the federal government hadn’t increased unemployment by $600/week or paid out $1,200 (or more) to every tax filer?
If the Federal Government hadn’t included such payouts in the CARES Act multifamily would undoubtedly have been hit much harder than it has so far (and it still has been hit hard – just not as hard as other product types). If California passes the law requiring landlords to drop their rent 25%, multifamily will get destroyed (that isn’t a joke by the way, there are legislatures trying to get that passed. Thankfully it looks unlikely). Either of these situations would invalidate the original premise.
But assume that one of those two scenarios did in fact come to pass and multifamily investments were hit hard, harder than retail or office. Does that mean investments made in multifamily for the purpose of minimizing recession impacts were bad investments?
Maybe. But maybe not. The only way to know is to get emotion out of the way and analyze what had happened. Was a great investment good because of good investment decisions? Or was it because we got lucky? Was a bad investment bad because we screwed up, or because of some sort of black swan event that couldn’t be modeled?
For Altus, it is really important that we get our egos out of the way and review outcomes for the lessons, not to prove ourselves brilliant.
And for the country, it is really important that leaders, scientists, doctors, etc., get their egos out of the way and look at/review information not to prove themselves correct, but to learn lessons to make better decisions going forward.
*See below the signature line for a tangential bonus track if interested
About the Author: Forrest Jinks is CEO of Altus Equity Group Inc and a licensed real estate broker. Forrest has decades of experience as principal in a variety of alternative investment segments including real estate (residential rehab, in-fill development, multi-family, office and retail), debt, and small business start-up (online marketing and site retail). He can be reached at firstname.lastname@example.org.
Not mentioned in this article, but a close cousin of Begs the Question is Confirmation Bias. We are all biased. In and of itself this may not be a bad thing (e.g. when I am trying to eat healthy, I have a bias towards chicken and away from pork). The danger comes when we are not aware of our biases. Confirmation bias is one of the most powerful biases that can affect our rationality because it is self-reinforcing. Do I get irritated, annoyed, or angry when I am presented with data that doesn’t support my hypothesis or opinion? Then I am likely suffering from confirmation bias. This may be a subject worth discussing further in future Insights.