Iron Capital Insights

  • Iron Capital Insights
  • March 9, 2020
  • Chuck Osborne


[T]he only thing we have to fear is…fear itself. – Franklin D. Roosevelt.

Most people are familiar with this famous quote. Many mistakenly believe that FDR was talking about War World II, but that is not the case. This quote came from his inaugural address in March 1933, and the fear he spoke of was economic fear – the fear that had crashed the stock market in 1929 and brought on the Great Depression.

This quote is truer today than at any time I can recall in my career. The coronavirus itself will pale in comparison to the damage done by the fear of the coronavirus. The last time we dealt with a pandemic was 2009, with the novel H1NI virus, also known as the swine flu. How many people remember it? It did cause some issues; schools and camps closed for short periods here in the Atlanta area, as in many places around the U.S. and the rest of the world, but to be honest, I personally don’t really remember much about the ’09 outbreak. Do you? According to Wikipedia, H1N1 killed 575,400 people globally. Any death is a tragedy, but I note this for perspective. According to the Wall Street Journal, there are now approximately 110,000 cases of coronavirus globally. In South Korea, where there has been the most widespread testing thus far and therefore the best data, the mortality rate is 0.6 percent. Let’s put this another way: 99.4 percent of the people who get the coronavirus will have flu-like symptoms for a few days and then go back to work. Run for the hills!

The difference between today and the far more serious pandemic of 11 years ago is that we now have multiple groups in our society that profit from fear. The “reporting” of the coronavirus has been far closer to screaming fire in a crowded theater than actual information. Case in point: the headline in this morning’s Wall Street Journal is, “Coronavirus Cases Outside China Tripled in Past Week.” If one actually reads the article, the cases have gone from 10,000 to 29,306. The world population outside of China is 6.3 billion people. I set my business calculator to go out three decimal points and all I get is zeros when attempting to calculate this percentage. I was going to say this is like going from 1 to 3 percent, but it isn’t even within three decimal points of 1 yet.

I told our staff what I was going to write about this morning, and one of our analysts pointed out that he saw a headline in Globe magazine in the grocery store checkout aisle this weekend which said, “Coronavirus Will Destroy the World.” We expect that kind of sensationalism from tabloids, but The Wall Street Journal? The fact is, the media is loving this. They profit from fear. No one clicks on an article that says, “Number of Coronavirus Cases Outside of China Remains 0 Percent out to 3 Decimal Places.”

The media is not the only segment of our society which profits from fear; short sellers make money when stocks go down. Selling a stock short means one sells shares of a company that he does not actually own; he “borrows” the shares and promises to eventually close his short position by buying the stock, but he hopes to sell high and then buy back at a lower price. Historically, speculators who did this had to wait for what we called an uptick. In other words, the last trade of the stock in question had to be positive, then he could sell it short. Then, he would have to wait for a positive move, and he could sell it short again. This is the way the market worked from 1938 until 2007, when the uptick rule was removed.

Today short sellers can just sell away with nothing stopping them. They do it by computer, so they can sell more and more until markets open down 7 percent. During this latest crisis, at Iron Capital we have had no one call us panicked; we have had only a few calls from any client who was concerned. We have had more clients sending us money to take advantage of these prices. I point this out because at some point one has to ask, who is selling? Investors are not selling, so that leaves us with the short sellers. They are profiting from fear.

All of this would be just a sad commentary on the state of our media and Wall Street if it did not have real impacts. However, people and organizations are canceling events all over the place. This may not seem like such a problem, but it is if you are in the hotel business or travel industry, for example. This impacts lives, and for more than just a few sick days. Economists and people like myself who think in terms of growth are often labeled as cold and calculating; nothing could be farther from the truth. Economic activity means jobs. It means food on tables and roofs over heads. If we allow those who profit from fear to create an actual economic crisis out of this bug, then people will lose wages. Some will go hungry, and others may even lose their homes – because of fear.

The stock market will bounce back, and 99.4 percent of the people infected by this virus will bounce back, but the people who get laid off because of this fear will truly struggle. People who give up on investing for retirement because of the day-to-day craziness of computerized speculators will not be able to support themselves in retirement. Fear of the coronavirus will do and is doing far more harm than the virus itself. Is this now how we are supposed to act each and every flu season?

We talk all the time about being prudent investors. We should all be prudent with our health, all of the time. Hiding from our fellow man because of a virus is not prudent. We have to fight the fear as well as the virus.

Warm regards,

Chuck Osborne, CFA
Managing Director