In 1969, the United States experienced one of its most intense hurricanes in history. It was called Hurricane Camille. It reached wind speeds of 280km per hour. It killed more than 250 people, and caused over $2 billion dollars in damage (in today’s dollars, NZD).
Hurricane Camille narrowly missed the city of New Orleans.
In 2005, only 36 years later, there was another major hurricane. It wasn’t as intense as Camille, but it was larger, and this one didn’t pass by New Orleans like Hurricane Camille. It went straight through the city.
Hurricane Katrina killed over 1,800 people, and caused close to $200 billion in damage (NZD).
As Amanda Ripley describes in The Unthinkable. “the victims of Katrina were not disproportionately poor; they were disproportionately old. Three-quarters of the dead were over sixty [and half] were over seventy-five”.
Most of these people were middle-aged when they experienced Hurricane Camille.
Ripley quotes Max Mayfield, director of the National Hurricane Centre, as saying “I think Camille killed more people during Katrina than it did in 1969”.
His argument is that the people who experienced Hurricane Camille learned the wrong lesson. Hurricane Camille was an intense hurricane that didn’t pose the risk they thought it would. This made them complacent when Hurricane Katrina approached, so they didn’t evacuate when they should have.
I’ve thought about this a lot since April 2020. After dramatic drops in international sharemarkets in March 2020 once the reality of Covid hit, these same markets experienced a rapid recovery. Most losses were recouped in April 2020, and markets fully rebounded within months.
You couldn’t wish for a better recovery. But I always try to think of second-order effects, and I wonder whether this will impact the psychology of investors in the future.
There is a generation of investors for whom this was their only major downturn. I fear that this has created an expectation that future recoveries will be as swift as we saw in 2020.
Downturns can last for much longer than one month. Markets can stay fall, or stay static, over extended periods of time. It’s rare for recoveries to take place in just a few months.
Am I making a prediction about what will happen in the future? No. At any given point in time, there are many potential scenarios that could play out. I’m just entertaining a scenario that I consider to be fairly likely. (Even though I’d like to be proven wrong!)
Arguably, Hurricane Camille killed more people in 2005 than it did in 1969, because people developed the wrong expectations and learned the wrong lessons.
Please don’t make a similar mistake when it comes to your investment decisions. Don’t get impatient when a market fails to respond in line with the expectations you’ve learned from recent history.
Many residents of New Orleans should have evacuated more readily when Hurricane Katrina came along. In contrast, people should be prepared to stick around – and hold the course when a more sustained downturn occurs.