Letter # 23, 18 December 2020
The fundamental difference between truth and fiction is that fiction must always make sense. Let’s compare the following two events:
One: This Monday, Stefan Lofven, Sweden’s Prime Minister, said that the country had underestimated the likelihood of a second Covid wave, reports the NYT (1). As of writing this letter, Sweden has reported close to 350,000 cases and over 7,800 deaths due to coronavirus. Its deaths per million of population, at 770, is over 7x the average of its Nordic neighbours. Around 3,000 nurses have quit their jobs this calendar year and Stockholm reported that ICU capacity has hit 99%, and that Sweden will be forced to send Covid patients to Finland (2).
Two: It’s that time of the year when mountains are clad in slow and the ski season is upon us. But, it’s also corona time; hence, France, Italy and Germany have shut their ski areas till January. Austria opens on 24th December with severe restrictions in place. Sweden opened its ski lifts last week.
Sweden has always been an outlier through the pandemic; it has kept bars, schools, movie theatres and gyms largely open. Its chief concern was that everyone being holed up at home could lead to depression and suicides. Ander Tignell, the state epidemiologist, in an interview in October 2020, hoped that the spread of immunity would help the country get through the fall.
It could well have been just a case of a strategy that didn’t work; a costly mistake, but an honest one. Afterall, under Swedish law, the government isn’t allowed to force people to stay at home (yes, they are thinking of an emergency law that will give it the power of lockdowns (1)). Where it gets outlandish is on two accounts.
First, face masks aren’t recommended in Sweden because the Public Health Authority says there isn’t enough evidence that they work (3). 170 countries around the world recommend using masks; using them has no side effects. Hence, citing absence of evidence for not using them is inexplicable.
Second, Sweden’s “health experts” were so confident of their approach that they were schooling other countries. Prof. Johan Giesecke (Tignell’s predecessor and co-thinker (4)), in an interaction with an Indian politician said, “in India, you will do more harm than good with strict lockdown measures.” And that, “it is a very mild disease. 99% infected people will have very less or no symptoms (5).” Had India followed his advice, cases in India (extrapolating Sweden’s numbers) would have been closer to 73mn (versus 10mn currently) and deaths at 700,000 (144,000 currently). And this is without considering India’s higher population density and its inferior public health services (the curve is not just linear then; it gets exponential in accounting for these two conditions). Arguably, cases in India may have been underreported, but hiding deaths of this magnitude would have been difficult. While India, thankfully, chose not to pay heed to such “experts”, it brings two issues into focus.
First, as Nasim Taleb writes in his book, Skin in the game, that while in the past people of rank or status were those who took risks and those were the ones to face the downside for their actions. Today we are witnessing the opposite of such heroes: bureaucrats, bankers and academicians with too much power and no real downside or accountability. At no point in history so many non-risk-takers have exerted so much control. This rings true for many industries, including asset management (we have written about it before link). In our view, fund managers and sales teams must be compelled to have equity exposure to funds in which they ask investors to invest in. For us, if we don’t put our money where our mouth is, we don’t deserve your time, let alone your money.
Second, no matter how strong your conviction, a rigid straitjacket framework seldom works. Over the past two years (and until a few months back), markets seemed to have gravitated towards the theory that ‘a good company is a great investment at ANY price’. Such companies will keep getting bigger at the expense of smaller ones, and as such, large market-cap companies will continue to outperform small sized ones. However, charts below indicate the opposite.
Over the past 17 years, total returns for Sensex, BSE Mid-cap and BSE Small-cap indices have been similar, but they have rarely moved in tandem; there have been years when the Sensex outperformed the other two indices and vice-versa. Instead of a formulated straitjacket that large caps are the only investible universe, we have found that taking advantage of such market mispricing helps us generate superior alpha over time.
In the end, even as Sweden is working extremely hard to contain the Covid situation, the same Prof. Johan Giesecke (Tignell’s co-thinker, proponent of herd-immunity and one in those interactions with an Indian politician) has been promoted by the WHO as the vice-chair of the Strategic and Technical Advisory Group on Infectious Hazards (6). If this doesn’t increase our collective faith in total and urgent need for having ‘skin in the game’ in all walks of life, we don’t know what will.
(1) In Sweden, Infections and Calls for a Lockdown Are Rising – The New York Times (nytimes.com)
(2) Is the second wave overloading Sweden’s intensive care units? – The Local
(3) Covid-19: Sweden Rejects Face Masks as Cases Soar, ICU Beds Fill Up – Bloomberg
(4) Sweden’s “herd immunity” policy produces disaster – World Socialist Web Site (wsws.org)
(5) India will ruin its economy very quickly if it had severe lockdown, Swedish health expert tells Rahul Gandhi (freepressjournal.in)
(6) Sweden’s ‘Herd Immunity’ Mastermind Gets Promoted by WHO (newsweek.com)