What the coronavirus crash teaches us about herd mentality

What extraordinary times. What an extraordinary correction. The corona crash. I don't think any of us have seen this sort of correction before. Straight down 38% in 22 days.

You had to act fast, very fast. Then the bounce, up 22% in 13 days. You had to act even faster.

In this correction, some fund managers will crack champagne at a 1% outperformance over a year. The Marcus Today growth fund, which manages $40 million, outperformed more than 20% in just over six weeks. It's been an extraordinary moment for us and our investors.

Of course, it's been part luck; of course, we could get it wrong tomorrow. But it has also been part experience and part having the cold, unemotional detachment to make significant, unconventional decisions, quickly.

I've learnt a lot from my mistakes: that correction in October 2018 that ruined Christmas for everyone beat some harsh lessons into me.

And I have learnt some new lessons from this recent correction and our management of it. Lessons that need to be chronicled, and here they are - short-form instructions on how to handle this sort of volatility, from experience.

Headless chickens multiply in uncertainty

Watch them, don't join them. I have been quite surprised at some of the revered commentators who have lost their way/heads in this episode. Rambling articles, some even admitting they are headless; some containing inappropriately strong views based on guesswork.

I have even had to rein in my team at times, more recently when they have embarked on emotional end of the world rants about COVID-19 and the human and economic tragedy. That's not our job.

Our value is to watch the headless chickens and move against them, exploit them, when they reach their extremes. The coronavirus has offered up some rare moments of opportunity, once-in-a-decade stuff, moments that will disappear. We can't wait another decade for the market to lose its head.

To exploit these moments you need cold, unemotional observation and decision. You can't do that if you buy into the hysteria that is providing that opportunity, that extreme. Keep your head.

Do not take a view

You don't need to. Most people are guessing at the best of times; in uncertain, volatile times the reliability of a view becomes exponentially valueless. You don't need to guess. Leave the guessing to the herd.

Your job is to read the herd, not join it. If you take a view you peg yourself in a particular spot on the spectrum, from super bear to super bull, and having taken that view, especially if you take it in public, you are committed by pride of intellect to hold that view.

It is foolish and needless. Do not take a view.

Read a lot

The market is priced on the consensus view. Distil the consensus from reading what everyone else is reading. Read even the dull and ignorant.

They, too, are part of the herd. Interestingly, the most radical views are the most persuasive and the most promoted yet the most likely to be wrong. But we should encourage their authors because they create those extreme moments in prices that are the opportunity.

In the end, reality will be somewhere in the middle, not at the extremes. But you need to know where the middle is. Read a lot.

Temporarily dismiss fundamentals

In volatile times, timing comes from reading the herd, not from scientific analysis. At times like this fundamentals go out of the window. You cannot value any company accurately, especially in this episode.

Without knowing the duration of lockdowns, you cannot know earnings, which are the key input (before a lot of other assumptions) in all valuations. The "scientific" value-based arithmetic that provides price structure in more normal times simply disappears sometimes, like this time.

There is no valuation structure/standard/yardstick. Accept it. Do not be confused or rendered ineffective by it. When value is unknown you are left with sentiment only. Herd sentiment.

Watching, reading and reacting to (not predicting - but responding to) changes in herd sentiment are how you survive/succeed/exploit these periods. That's how we did it.

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