According to the popular press, Australians are racing out to buy hand sanitiser and face masks to protect them from the coming apocalypse. I do wish someone would tell them that neither will help. However, as someone who is fascinated by group behaviour hence my belief that Charles P Kindleberger’s Manias, Panics and Crashes is an essential component of everyone’s trading library I thought I would go back and have another look at the new figures for COVID-19 deaths in China. I am only looking at China because the majority of deaths are there and the scale of China is confusing many and makes most analysis by the mainstream media meaningless.
I know I sound like a broken record when I say context is everything but without context, particularly in trading, you are stuffed. You will tend to react to every emotional swing in the market with your own over exaggerated emotional swing.
I was able to dig up some data on all causes of mortality for China – this data presents itself as deaths per 100,000 so I had to adjust it for the total population and then generate a figure for the number of deaths since the outbreak began. This is rubbery and is only a guesstimate but the scale of the numbers even though they contain a margin of error are still remarkable. The data is presented in the table below.
The relevance to trading is quite simple – facts matter hyperbole doesn’t. Even though the market is subject to the whims of the crowd it doesn’t mean we have to be – that is why we have trading plans and we accept that sometimes the market goes up and shock horror sometimes it goes down. However, the market entering a period of drawdown does not mean the world is ending as can be seen from the drawdown figures for the SPY (S&P500 ETF) below.
What this shows is that drawdowns irrespective of their cause are a fact of life and something traders have to deal with on an ongoing basis. There is simply no getting around this. If you want to trade or invest in any instrument over any time frame you are going to have to accept that a good portion of your career will be spent managing times when things are not going your way.