National Pandemic

The six most dangerous words, Part 1

By Constantine Valhouli  |  August 9, 2020 9:52 AM

The six most dangerous words in investing (and well, life) are 'Things will be different this time.'

We tend to have a cognitive bias towards both the familiar and to successful outcomes. Except when it is too difficult to imagine the alternative, and we simply extend the growth chart indefinitely up and to the right. For those who remember the dot com market run-up of the late 1990s that abruptly ended in April 2000, all the rules were out the window. Metrics? Who needs 'em? Price to earnings ratio? What are earnings? This worked by common consensus – and aided by any number of well-meaning (read: well-paid) research analysts who helpfully kept offering alternative metrics – until it didn't. In hindsight, metrics like price-to-number-of-employees or price-to-square-feet-of-office-space-rented – sadly, I'm not making these up – weren't quite an accurate measure of a company's financial health.

As the financial effects of the pandemic and lockdown continue to ripple through the world economy, we're still clinging to the inverse of that adage: "We can't wait for things to return to normal." Historically, another adage has regularly been invoked – "Don't bet against New York City" – but I cannot help but feel that many of the people who have said that most often and most loudly have upped sticks for the Hamptons or the Connecticut coast.

A return to economic normalcy hinges on a safe and widely-available – and widely taken (cough cough) vaccine. Until then, the metrics which drove value for many asset classes of real estate will remain upended. Office space is effectively in freefall as work-from-home went from a perk to the norm. Foot traffic and the relative affluence of the humans that own those feet have been major drivers of retail asking rents. With everyone working from home, Midtown Manhattan is a ghost town. It uncomfortably evokes the tumbleweeds and dust in Wild West frontier towns, and more than a bit of the vibe of I Am Legend.

Things might actually be different this time. It will be interesting to see how people react to that.