INN spoke with three experts about how investors can protect their wealth when black swan events shake up markets.
The novel coronavirus (COVID-19) outbreak centered on Wuhan, China, has now claimed the lives of over 2,000 people, with more than 70,000 infected as of mid-February.
Fear has spread around the world through society, governments and economic sectors, with the overall impact of the outbreak far from being known as it remains uncontained.
With such disruption, the impact on global markets has been widespread, with base metals and energy being the hardest hit. Smelters in China are throttling production and transportation needs are drying up as cargo shipments fall and drop offs in tourism cut into air travel.
The Investing News Network (INN) reached out to three experts in the resource space to ask how investors in commodities and markets can best protect their wealth during events like COVID-19 — which was described by Lobo Tiggre of Independent Speculator as a “classic black swan event.”
A black swan event is defined as a rare event so unpredictable and beyond expectation that it is almost impossible to plan for it or its consequences.
“If we want to invest in industrial resources like copper and iron, which have both been whacked by this outbreak, we can’t stay out because there might be a black swan event. There can always be a black swan event. The only way to avoid such events is to stay out of the market entirely,” said Tiggre, adding that black swan events make diversifying your portfolio to include some gold and silver important.
“It’s not because we’re speculating that prices will go higher — that’s what gold and silver stocks are for. We buy safe haven assets like gold and silver because they protect us in the case of some major black swan event taking other assets down.”
Jayant Bhandari of Anarcho Capital also highlighted diversification as the way to protect wealth, saying that at all times, investors need to have portfolios diverse enough to account for systemic risk.
“A portfolio in which systemic risk in one investment leads to reward in another is ideal. Of course, there is no defined math on how to do this, but the only reason we diversify across jurisdictions, commodities, kinds of projects and industries is to nullify systemic risks negatively affecting our portfolio. We should minimize diversification, but still do enough of it to iron out systemic risks.”
Brian Leni of Junior Stock Review said that because the coronavirus outbreak is a black swan event and therefore unpredictable, “(Investors must) always be cognizant of the fact that external events can happen (and) there is always risk to your investment dollars.”
Leni also said that it is important to refrain from investing based on predicting where the future will take commodities, and advised investors, “Speculate with money you can afford to lose, and stay within the confines of your risk tolerance and you won’t feel as much of a need to emotionally react to situations that may arise.”
So what should investors be doing?
When asked what investors should be doing today, Leni said that it is too early to know how they should react as there isn’t enough information available about what the economic fallout may be.
In answers given at a time when COVID-19 was still very much uncontrolled, Tiggre offered some mites of wisdom about the options available to investors.
“Going to cash for now makes a lot of sense to me. Hard to go broke accumulating cash.”
On the topic of precious metals, he said that the outbreak just “drives home the lesson” that gold and silver are the best safe havens. “Making sure one has significant savings in gold and silver, as above, always makes sense … and if I wanted to speculate based on the outbreak, I’d buy more of the best gold and silver stocks.”
He added that investors who want to be very aggressive (which is not his strategy in this case), could short sell any companies that could be hurt by shutdowns in China. “Apple (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA) come to mind,” he said.
If you’re thinking that medical research companies would be a great place to park money, Tiggre warned that that is not so. “By the time they can do anything relevant (for the coronavirus), it will be history.”
Given that many commodities are being directly affected by COVID-19 and the associated shutdowns, INN asked what the best safe havens are, and both Tiggre and Leni pointed to precious metals as the best traditional bets.
“Precious metals, in particular gold, remain safe havens for capital. I don’t see this changing anytime soon,” said Leni.
On what investors can keep an eye on as the situation develops, Tiggre highlighted factors like the inflection point between infection and death rates, Wall Street “waking up” to the economic fallout, weaknesses in industrial metals (including platinum and palladium) and the strength of gold and silver ― adding that by keeping an eye on all of the above, investors may even be able to get ahead.
Speaking on the same topic of getting ahead, Leni went for the impact on base metals, saying that for those that believe the coronavirus is contained, “there may be opportunity as many base metal companies have seen their share prices fall.”
Bhandari posed his own question: “Have projects completely unaffected fallen in value more than what was justified because of fall in commodity prices? If yes, that’s where to invest.
“It is diversification that allows you to mitigate systemic risks. Often thinking about what one can lose before investing in any entity allows one to focus on protecting his capital. More often than not such events give you opportunities to make money rather than lose.”
Lessons for tomorrow and the media today
As a continually developing situation, news around the coronavirus outbreak will be very different a week from now. With more analysts starting to turn to economic fallout and what’s next, news coverage will likely shift from panic and fear to concern about the economy.
While cautioning that investors shouldn’t be distracted by comparisons downplaying the impact of COVID-19 by likening it to the regular flu or car accidents, Tiggre said, “As investors, what matters are the economic consequences of this outbreak.”
He continued, “We can already see that China’s massive efforts thus far will have huge costs. Guidance from companies around the world on the impact of their operations being shut down in China or the sudden need to shift supply chains, etc., may come late. We must think for ourselves and not wait for companies (to) report on harm already done.”
Leni stressed that filtering out the noise is the best bet for investors going forward, saying that it is the nature of the media to portray incidents as being on one extreme or another.
Continuing a theme of caution about media coverage, Bhandari took exception to what he sees as cynicism from the international media about China, with some outlets playing up the belief that the situation is worse than reported.
“What I see — through rapid construction of hospitals, quarantine measures and self-quarantine measures of people and communities, etc. — (is) that even if China is hiding information, they are serious about controlling the virus. Could this scale of quarantine have been achieved elsewhere?”
Bhandari, who has talked with INN at length previously about his admiration of China, also took aim at those who have expressed apparent glee at the situation, in particular the American hedge fund manager Kyle Bass.
“Kyle Bass recently tweeted wishing that the virus should spread to China leadership. I found his views disgraceful. Alas, he affects thinking of many economists, investors and politicians. He has likely lost billions betting in favor of China’s fall, which hasn’t happened.
“I wonder how much of (Bass’) negative views about China are colored by his misplaced expectations and his refusal to give them up … If I had to look somewhere to understand China, I would look at those disinterested in it.
“But I must remind myself of the youthful, hopeful, energetic, creative society of China, and must see that despite the hiccups, the underlying value will eventually assert itself. I continue to be a huge believer in the future of China,” said Bhandari.
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Securities Disclosure: I, Scott Tibballs, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.