The Wuhan Black Swan

The recent ASX down­turn has made me think of the inter­view we did with Roger Mont­gomery last year where he pre­dict­ed that the next down­turn would be caused by a “black swan”, some­thing you nev­er expect and there­fore can’t pre­dict. You can only pre­dict that a black swan will hap­pen at some time. It remains to be seen how long it will last and how bad the down­turn will be, but the Chi­na Wuhan coro­n­avirus scare is cer­tain­ly one of those black swans, so Roger was right as usu­al.

As for what it means for our port­fo­lio, which has tak­en a hit but still out­per­forms the ASX All Ords by ~200%, accord­ing to Tony, he’s just going to do what he always does, in good times and in bad — read the AFR over break­fast every morn­ing, look­ing for news that might affect his stocks, and keep an eye on the three-point trend line for his stocks, sell­ing when they breach the down trend line. Apart from that, it’s busi­ness as usu­al, no need to pan­ic. In fact, if the down­trend con­tin­ues, it will be an oppor­tu­ni­ty to buy qual­i­ty com­pa­nies cheap­ly. Fun­ni­ly enough, Tony wrote a post about his strat­e­gy dur­ing a down­turn a few weeks ago, just before the Wuhan news had any impact. Is he a prophet? Or just a prof­it?

Because we are only buy­ing stocks from com­pa­nies with a strong track record of prof­it, growth, and sol­id man­age­ment — and we’re only buy­ing them when we can pick them up at a dis­count — we have a safe­ty mar­gin. We can be fair­ly con­fi­dent that these busi­ness­es will con­tin­ue to be run well dur­ing the cri­sis (even those like Qan­tas that are in the direct fir­ing line of the cri­sis) and that their share price will bounce back after the cri­sis sub­sides.

There will, of course, be an impact on some of them, espe­cial­ly those involved in tourism to and from Chi­na.

Accord­ing to Rajiv Biswas, Exec­u­tive Direc­tor and Asia-Pacif­ic Chief Econ­o­mist, IHS Mark­it:

Aus­trali­a’s tourism econ­o­my, which is already reel­ing from the impact of the bush­fire cri­sis, will be bad­ly hit by the absolute trav­el ban on vis­i­tors from main­land Chi­na that has just been imposed by the Aus­tralian gov­ern­ment. Chi­na has become the largest source coun­try for inter­na­tion­al tourist vis­its to Aus­tralia, account­ing for 1.4 mil­lion vis­its in the 2018–2019 finan­cial year, or around 15% of total inter­na­tion­al tourist vis­its to Aus­tralia.

How­ev­er, as Tony point­ed out on this week’s upcom­ing episode, Qan­tas has so far said the trav­el ban will have lit­tle impact on its rev­enues, so there’s no need for con­cern, even though their price is down 10%.