Goodbye "Panic," Hello "Rational Thought"

"Panic is a sudden desertion of us, and a going over to the enemy of our imagination." – Christian Nestell Bovee

The market could be summed up by one word: panic.

Most of the panic stems from the obvious potential dangers of coronavirus. Clearly, diseases and viruses should not be taken lightly. On the other hand, there is a point where the concern seems to be way more excessive than necessary.

If you remember the ebola scare in 2014, you'll remember the worldwide fear that everyone would contract ebola. I remember how serious these threats were. There were genuine concerns that the world was going to end – or so it seemed.

So what happened?

Although the death rate for ebola was quite high (nearly 50%), it suddenly disappeared. No one was talking about it anymore. No one was discussing the potential of a pandemic. The panic seemed to have faded away very quickly. Only a handful of people in the United States contracted it, but the disease essentially became nonexistent in this country.

How does this parallel with our situation today? Let's look at what we know so far.

The coronavirus has a death rate of around 3.4% according to the World Health Organization. This is vastly different from ebola where nearly every other person who contracted the illness had passed away. There are nearly 100,000 worldwide cases of coronavirus as of today, but the seasonal flu has affected nearly 15 million Americans alone this season.

I know what you're thinking – the death rate for the coronavirus is higher than the seasonal flu. You're right. That being said, no one is talking about the 96.6% of people who have not passed away from the virus. It also doesn't seem as if the mortality rate is increasing to a dangerous level. The mortality rate is certainly nowhere near the 50% rate that ebola carried. The concern that I've personally seen so far is simply that the virus is spreading, but the death rate does not seem to be increasing. This is relieving, and it would certainly be more concerning if the mortality rate steadily increased with no end in sight.

At some point, these fears have to disappear. We're not seeing that at all in the market. There is constant panic about this virus - and it's something that the media simply can't seem to stop discussing. Media channels are airing special shows dedicated to this virus. It's a bit ridiculous.

As of today, we have only around 100 cases and a handful of deaths in the United States. Does this really justify a 13% drop in the market?

The problem is that the media continues to go to worst-case scenario here. Media outlets are conducting polls that indicate how scared people are, how people are traveling less, and how much people believe that this will become a pandemic. Most of these people are simply reinforcing what the media stations are telling them. They really have no clue as to the truth of the situation at hand.

While the market continues to swing up and down, don't go into panic mode. It won't help. There's a real need for rational thought in a situation like this. As the quote at the beginning of this article tells us, we lose ourselves in panic. Panic leads to us imagining worst-case scenarios. That's the fault of human nature. But if we learn anything about investing, the lesson is that human nature is problematic when it comes to rational decision-making in the market.

Behavioral economics tells us that people prefer avoiding loss rather than seeking gains. This is problematic in this market because we are essentially telling ourselves that we are destined to lose money if there is a pandemic. Again, the problem is that people are not looking at the virus risk rationally. They only see the fear that the media is touting on a daily basis. I can't even watch CNBC (or any news channel) without seeing a headline about the coronavirus.

At some point, enough is enough. Here's a reminder for you: the world is not going to end. Of course we need to protect ourselves as always, but this is not a cause for irrational panic. These are times that truly test people - and the test is whether you can be disciplined while everyone else loses their minds. Test yourself in this market by thinking rationally and thinking for yourself. Don't fall into the hype.