The Positive Case and the Negative Case

(Zen Buddha Silence by Marilyn Barbone)

(Image: Zen Buddha Silence, by Marilyn Barbone)

April 12, 2020

Given how much uncertainty there is about the future, both in terms of the coronavirus and in terms of the economy, it can be helpful to consider the positive case and the negative case.  Howard Marks writes that whether you favor the positives or the negatives depends on your innate psychological biases.  Some people tend to be optimistic, while others tend to be pessimistic.  See:

Marks admits to being somewhat pessimistic.  I admit that I tend to be optimistic.  But regardless of whether you’re an optimist or a pessimist, an investor must consider both the positives and the negatives.  Sometimes things work out better than expected, while other times things can get much worse than expected.



The countries where the coronovirus first appeared have made progress.  China has ended the lockdown in Wuhan.  The numbers continue to improve in places such as Italy, Germany, Austria, and Spain.

The United States appears to have just passed peak resource usage and peak daily deaths, while the total number of deaths forecast to occur by August 4, 2020, is 68,841, which is much less than originally forecast.  Each death is a tragedy.  But it’s important to see the overall deaths in context.  In the 2017-2018 flu season, there were 61,000 deaths in the United States, and that’s something for which we DO have a vaccine.



It seems that the coronavirus can be nearly stamped out within three months or so, assuming widespread testing, contact tracing, and quarantining.

The R0, the rate of contagiousnesswhich measures the average number of people who will catch the disease from one contagious personappears to be far higher than previously thought.  Early on, researchers believed the R0 of the coronavirus was 2.2 to 2.7.  A more recent studywhich is probably more accurate, because it’s based on more and better dataestimates the R0 to be 5.7.  This means there are many people who have the coronavirus, but are asymptomatic.  This increases the probability of herd immunity and lowers the risk of reopening the global economy.  See this Forbes article:

Never have there been more doctors and scientists focused on one problem: developing treatments that aid recovery from the coronavirus and developing a vaccine.

Howard Marks summarizes the positive case for the economy:

The negative impact of the disease on the economy will be sharp but brief The term “V-shaped” dominates most forecasts, both between Q2 and H2 and between 2020 and 2021.  Thus, for example, one forecaster who has the earnings of the S&P 500 companies down 120% in Q2 thinks they may rise roughly 80+% in Q3 on a quarter-over-quarter basis… and then rise by a further 50% in Q4.  And after a decline of 33% in 2020, earnings will rise by 55% in 2021 and exceed what they were in 2019.


The Fed and the Treasury have both announced massive stimulus plans which should shore up the economy until the coronavirus has been brought under control.

The banks have only a third of the leverage they had during the Global Financial Crisis.  The financial system is much stronger.

The U.S. private sector will produce huge amounts of supplies and equipment, and will develop testing, contact tracing methods, treatments, and vaccines.



Howard Marks does an excellent job highlighting the negative case here:

Since Marks wrote his memo on March 31, the United States appears to have passed its peak in terms of resource usage and daily deaths.  So I will summarize the negative case as it seems today.

The United States lags behind many other countries in terms of widespread testing, contact tracing, and quarantining.

Without the government stimulus, the economy was set to decline at a record rate.

Even with near-record government stimulus, is a V-shaped recovery realistic?

There are companies with revenues down and there are other companies with revenues that are gone entirely.  But some costs are fixed and thus cannot be eliminated.

Many companies were highly leveraged going into the pandemic.  There will be rising defaults until the economy rebounds, which could take months or longer.

The collapse in oil prices, which reached a level almost as low as 1973, is a negative.  There will be large losses for oil-producing companies and countries.  There will be job losses, as more than 5% of American jobs are in oil and gas.



An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.


If you are interested in finding out more, please e-mail me or leave a comment.

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Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.