Catastrophes, and the Trouble With Inside Information

The document from which I excerpted the above will one day be a historic one, and I vividly remember reading it late last year. But let me backtrack a little first.

Why, in late 2019, was I reading, on an infectious disease mailing list, about undiagnosed pneumonia in China? After all, I’m not an infectious disease specialist, nor an investor in related companies. I’m no more a hypochondriac than the average person who has used Dr. Google now and then, nor am I immunocompromised and worried about the next viral infection. 

It all started in early 2003. A then-colleague sent me a link to strange happenings on a mailing list I had never heard of, the previously mentioned ProMed. 

It was, of course, the first report on what would eventually become known as SARS, severe acute respiratory syndrome. Like the current outbreak, it was a coronavirus that had spilled over from an animal reservoir to humans, with tragic implications—and like the current outbreak, reports showed up very early on ProMed, if you were looking.

To return to where I started, here is more of that December 30th, 2019, ProMed mention of what has since become known as SARS-CoV-2. It is a machine-translated version of a news story:

And there is this attached comment from a ProMed contributor:

It makes for remarkable reading. All the pieces are there, but you can see the resistance to believing it is happening again. Within days, however, reports on ProMed made it obvious that it was happening again, and that, protestations to the contrary, it was spreading human-to-human, away from so-called wet markets, and, most troublingly, there was asymptomatic transmission. Unlike the coronavirus that caused SARS, which hit people hard and only then became infectious, this was spreading much earlier and more insidiously. 

What, you might ask, did I do with this? As the reports grew into the first week in January, I shared them with investor and doctor acquaintances, most of whom were dismissive (with the exception of my good friend Dr. Howard Luks, who, like me, saw the gravity of a less-lethal SARS-like virus with asymptomatic spread and high infectiousness). 

Trying to figure out what to do with all of this, I entered a put position on the S&P 500 in mid-January, thinking that markets, as they chugged to all-time highs, were badly over-discounting what was happening. Casting around, I contemplated a position at prediction market Predictit, wagering that there would be a recession in 2020. Mindbogglingly, at least to me, you could have that contract for less than $0.20 as recently as late February.

How did all that work out? I’m unhappy you asked: I closed my S&P put position too soon, making only modest profits, and never entered that Predictit recession position, which would have been a clean four-bagger. 

There are some lovely studies of this topic, showing how even early access to newswires is harder to profit from than you might think. You need the right idea, at the right time, and at the right size. And even then the market can move against you far enough and long enough that you give up on a good idea. Case in point: The S&P 500 was still hitting all-time highs in late February, a month after I had convinced myself a wave was growing offshore and getting ready to break—and only days before it finally cratered as we tumbled into our current malaise.

Perhaps appropriately, it is difficult to make money from misfortune, even when you are confident misfortune is coming. That, if nothing else, is a ray of sunshine in this unhappy episode.