US stock trading has been halted four times within 10 days in March 2020. 89-year old Warren Buffett only saw this once in his first 88 years. EVERYBODY OUT OF THE POOL! Bonds, gold, oil, cryptocurrency, and stocks — most of the financial assets you can find in a general investment portfolio — all plunged.
Why did the stock market crash?
According to the catastrophe theory by Mark Buchanan in his book “Ubiquity: Why Catastrophes Happen”,
Catastrophe ≈ Complex System + Critical State + Trigger
- Complex financial system: especially after 2008, macroeconomic policies created a global financial system that is much higher in interdependency and complexity.
- Critical state: the US has had a bull market for 11 years, with frequent big jumps in value.
- Tigger: the oil price war between Russia and Saudi Arabia; the fast-spreading pandemic.
How do we think and act in the coronavirus pandemic caused catastrophe?
There is no obvious cycles in stock market crashes. Spanish flu in 1918, Black Monday in 1987, the subprime crisis in 2008, and so on. From a data scientist’s perspective, I would have to confess that there is no obvious cycle in financial crises that would allow us to use any typical time series forecasting technologies to predict the next one.
The next catastrophe could be 10 years from now, or it could be next month, or it could be NOW. How do we think and act in a world of unpredictable uncertainties?
1. Seeing the lake for black swans
A lake is not just for white swans. There can be black swans, maybe even green swans, purple swans, or red swans. There could be things beyond human cognition, and we should always be prepared for the unexpected:
Be financially ready, physically ready, and mentally ready.
- Financially ready: Keep a portion of your savings in cash no matter how good the stock/bond/oil/gold/cryptocurrency market looks. How much should you keep in cash? 15%, 25%, or 30%? It depends on your age, income, saving, risk tolerance, and expectation.
- Physically ready: Do workouts as a daily routine, take cold showers, try intermittent fasting, and so on. All these can increase your stress level, and by doing this you are training your body to handle high-pressure situations.
- Mentally ready: Instead of being reacting to a crisis with panic, we can see it as a call to rise above our everyday existence. Life is not just about me. By reaching beyond anxiety about my own future, I can focus on what I can do for neighbors, coworkers, and people in the frontline.
2. Slash careers, slash revenues, slash planets
“Don’t put all your eggs in one basket.” Build a diversified mindset to lower risk:
- ‘Slash careers’ means having multiple careers. A software engineer can be a gym instructor, an accountant can be a writer, a salesperson can be a pianist, and a banker can be a photographer. Start with your hobby, and expand it as part of your career. Another core idea is to gradually build up passive income.
- ‘Slash revenues’ means a company having multiple sources of revenue streams. Offering products and services, providing online products and in-store products, slash markets, having customers in Europe and Asia, making a team of on-site employees and remote employees, and so on. The essence of business is to satisfy needs. A company should be flexible enough to adjust itself to feed the needs in special times. For example, Tesla or Boeing can build ventilators, while Louis Vuitton or Prada can produce masks.
- ‘Slash planets’ means more than one planet for human beings. It is not something that any individual can achieve. However, at least we can see the value of Elon Musk’s ambition to get to Mars.
3. Robot, robot, and robot
As of March 20, 2020, at least 60 Italian priests have died in the coronavirus pandemic. This work of priests needs to be done in the room: besides the bed of the person who is dying. It cannot be done by robots, or even remotely. But how about other people who serve on the frontline?
Doctors, nurses, cashiers in the grocery stores, heroes who fight on the frontline are at high risks of getting infected. Factories that are essential to the supply chain have to shut down to prevent infection in workers. What if?! What if these jobs could be done by robots?
Some hospitals in China used robots to dispense pills to infected patients. Simple surgeries could be done by robots as well. Robots would not get infected and are able to work in factories, hospitals, grocery stores, or even deliver packages to your house. We need to have the vision to create such robots so that humans don’t have to fight alone.
The rise of robots is also a fundamental need of an aging world with a shrinking workforce. If you are an entrepreneur, or a venture capitalist, an engineer, or a government officer, think seriously about what you can do to help create a future where robots can truly give humans a hand.
4. Keeping the butterfly effect in mind
Jeff Bezos sold $1.8 billion worth of Amazon stock in early February 2020, a month before the stock market crash. Nobody can tell whether this sale is correlated to the coronavirus or not. Chess masters can calculate 30 moves ahead. At the early stage of this outbreak, a few people in the world already can foresee the crash in the stock market.
There is an old saying, “No egg can stay unbroken when the nest is overturned.” In the era of globalization, the destiny of all countries is intertwined and no one can stay aloof and unimpacted by a worldwide crisis like COVID-19.
Keeping the butterfly effect in mind, we can see the tornado before it arrives. We won’t go short on a stock market or stockpile toilet paper. But we can act early and stop it early. We can take social distancing seriously as early as possible and stop the spread of disease before it gets out of control.
5. Be a rational optimist
Acid rain, cholera, black death, Spanish flu, and so on. We have overcome so many challenges in history and now we are called for a new one.
Dylan Thomas wrote: “Do not go gentle into that good night. ” German Chancellor Merkel said, “I truly believe we can succeed in this task if all citizens truly understand their own tasks.” Compared to our parents’ generation, the availability of food and expected life span is going up; violence and infant mortality is going down. The mobile phone, container shipping, the Cloud, AI algorithms, the IoT, and the video meeting tools are powering people’s lives as never before.
Treasures, including knowledge, experience, technology, collaboration, and mutual dependence are causes for hope, not despair. Be a rational optimist and hold the faith that there is a better world tomorrow.
What is the amplifier circuit in the catastrophe?
Why? Why is the coronavirus spreading exponentially? Why are people panic buying toilet paper? The exponentially spreading of outbreaks like coronavirus is an amplifier circuit. Likewise, the undersupply of toilet paper is an amplifier circuit.
“The rich get richer and the poor get poorer.” Amplifier circuits enhance the positive correlation between things. For example, when the rumor starts of gas running out, some people will believe it, some people won’t. But it doesn’t hurt to drop by a gas station and fill up the gas tank.
When seeing the long line at a gas station, more and more people come to believe that gas is running out so they join the line. And this action, buying into the panic, finally causes the rumor to come true.
Amplifier circuits make good situations get better and bad situations get worse. Some people get infected; there will be more and more confirmed cases. Some people stockpile toilet paper, and then others join in to buy out supplies. Some people try to escape from the city when the lockdown news leak and the airport would be packed in a few hours. Some people panic sell stocks to cash out, and the global stock market becomes a bear market on the same day.
Behind all these examples, it lies the amplifier circuit.
In this article, we talked about the equation of why the stock market crashed, the amplifier circuit in the exponential spreading, and how to think and act in a world of unpredictable uncertainties.
Robot, Slash, Butterfly. The rise of robots for an aging world with a shrinking workforce; the slash careers as a way to diversify risk; and the butterfly effect for staying sensitive to the correlations between things and taking actions quickly.
As a rational optimist, we see the entire lake for black swans, we hold the long view and keep a steady course, we believe that tomorrow is a beautiful new world.
Can we fly high
When the body is light
The sky will be bright
And we can hug tight
- Mark Buchanan, Ubiquity: Why Catastrophes Happen
- Chris Clearfield and András Tilcsik, Meltdown: Why Our Systems Fail and What We Can Do About
- Dennis Sherwood, Seeing the Forest for the Trees: A Manager’s Guide to Applying Systems Thinking
- Matt Ridley, The Rational Optimist: How Prosperity Evolves
Many thanks to Mark Ryan for reviewing this article.