The COVID-19 Diaries – Week 12 – ‚A random walk down COVID-19‘
In general, a round of roulette can be seen from two different perspectives. One, that our odds are roughly 50 / 50 and we should not be concerned whether it is a monkey or Alan Turing betting with our capital. And two, that the outcome of the next spin can be sufficiently determined by the historical results of the game. In the latter scenario, most probably each of us would welcome the assistance of the British mathematician.
And based on our beliefs, we will apply different betting strategies.
Similarly to gambling, investing has its own set of strategies as well. Some hedge funds swear on systematic high-frequency trading, some are old school equity long-short and some bet on the macroeconomic factors. Academically, the highest yielding trading strategy since the early 2000s was merger arbitrage.
Majority of the academical context about investing assumes fair and frictionless markets. It is similar when we walk into the Casino de Monte Carlo with a lot of optimism. However, there is a so-called house edge.
House edge represents the average gross profit the casino expects to make from each game. The longer you play, the greater the odds are that the result of your play will match up with the house edge – and that you will lose money.
In finance, house edge can be translated into self-fulfilment. Essentially, we control the markets with our emotions – let it be positive or negative – and the price of a security on the short-run is less likely to reflect its intrinsic value.
Recently, JP Morgan CEO, Jamie Dimon suggested a pretty good chance for a quick US recovery. Markets are rising and the main market indices are close to pre-COVID levels. But always keep in mind, that there is a striking difference between the financial markets and the real economy.
During the 2008 crisis, the rock bottom of the financial economy was when the major central banks intervened. So far, rock bottom was exactly at the same time. However, given that the real economy is heavily lagging the financial markets, we should not be mistaken that in a couple months we are going to have a happily ever after. Moreover, there is a high chance that the store of value will simply change.
Well, all the money that Jerome Powel created overnight has to flow somewhere. That flow will have beneficiaries through one way another. There will be nations, industries and asset classes who are going to be clear winners and losers of the pandemic.
Consequently, the most important question is what is going to be a good store holder of wealth? Because when you are an institutional investor, it is not so easy to change from the roulette table to try your luck on a round of blackjack.
If you know the answer, let us know.
Stay connected and informed on the latest deal market developments.
The views, information, or opinions expressed in this blog series are solely those of the individuals involved and do not necessarily represent those of PwC Austria and its employees. PwC Austria does not give any representation or warranty of any kind (whether expressed or implied) as to the accuracy or completeness of the information contained in this blog series. It has been prepared solely for general informational purposes. Nothing in this document should be construed as advice to proceed or not to proceed with transactions or any other type of decisions.
Wir verwenden Cookies, um Inhalte zu personalisieren und Ihnen ein besseres Nutzererlebnis zu bieten. Durch die weitere Nutzung dieser Webseite stimmen Sie der Verwendung von Cookies zu. Lesen Sie bitte unsere Cookie-Richtlinie, wenn Sie mehr darüber erfahren möchten.