In his latest letter to investors, Seth Klarman discussed the possible longer-term ramifications of the COVID-19 Pandemic and included a list of eight changes to the future as we know it saying:
For most of the last century, a reasonable approach to assessing a company’s future prospects was to expect mean reversion. Fluctuations in business performance were largely cyclical phenomena. The stock market, as always, could be fickle. What was in favor today might well become disfavored in the future, and what was out of favor today might well rebound tomorrow.
This quote from Horace’s “Ars Poetica” was prominent in the preface to Benjamin Graham’s “Security Analysis”: “Many shall be restored that now are fallen, and many shall fall that now are in honor.” But today, technological disruption has damaged or destroyed many business models while elevating others.
At this moment, it’s hard to imagine Amazon’s online business collapsing or J.C.Penney’s retail operations being fully restored. Not everything will revert to the mean, and many companies, and especially small businesses, are reverting to not existing anymore.
In this spirit, we ponder the current moment from the “eye of the pandemic storm.” It’s always tempting at a time of upheaval to imagine that society will be forever changed. After the terrorist attacks of 9/11 that killed 3,000 Americans, it was easy to imagine a bleak future of mayhem and unbridled fear. And today, almost 19 years later, enhanced airport and office building security is still a regular part of our lives.
But it took only a few years for air travel to return to pre-9/11 levels, and life to basically get back to normal. In the depths of the 2008-2009 financial crisis, it was easy to imagine investor behavior would change forever, because investors would have been permanently chastened, but Jeremy Grantham at the time predicted that any change would not be long-lived, noting that investors “will learn an enormous amount in a very short time, quite a bit in the medium term and absolutely nothing in the long term.” And that’s exactly what happened.
So, we wonder, since life has been anything but normal over the last four-and-a-half months, what aspects of our daily experience might undergo lasting change as a result of the COVID-19 pandemic and society’s response to it, and what might quickly return to normal.
We believe there could be long-lasting implications, and ruminate on some of these in the pages that follow. We view this as an interesting exercise in trying to look ahead, although we harbor no illusions that the future will prove amenable to accurate prediction. Here is our list, ranked according to our level of conviction that the suggested changes will occur. A few of these ideas are clearly more conjecture than evidence-based at this time:
1. Acceleration of the digitalization of the U.S. and global economies
2. New ways of working, learning, and providing healthcare
3. Partial reversal of globalization and the development of an American industrial policy
4. Reckoning with the life and death implications of inequality
5. Real Estate becomes more challenged as an asset class with deteriorating fundamentals for retail, hotel, and possibly office properties
6. COVID-19 forces humanity to reorganize its priorities and better prepare for risk
7. “The Fauci Effect” –renewed confidence in experts, science, and truth, and a desire to serve society
8. Declining dominance of capital over labor
You can find a copy of the letter here:
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