72 - Binary Investing Outcomes: How the Coronavirus is impacting stock portfolios

Mental Models discussed in this podcast: Normal Distribution (Statistics) Resulting (Read: Annie Duke's book) Efficient Market Hypothesis Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode72 How coronavirus has modified the distribution of investment returns Typical investing outcomes - single distribution of possibilities High likelihood of a single point of returns (say 6%) Low probability of super high returns (>12%) Low probability of super-low returns ( Today's environment has a bimodal outcome for many companies directly impacted by the coronavirus shutdown. Instead of a single point of high probability outcomes, we have two center points. (15% and -80%) One may be around 15-20% annualized returns, but the other is highly negative and bounded by the zero-based outcome of the bankruptcy of the company. "The market has priced it in." It is almost impossible for the market to accurately price in a bimodal distribution of potential returns. Summary:  Investors today are likely underestimating the potential for bankruptcy of their favorite companies. Regardless of the long-term return of underlying assets, bankruptcy is possible when debt covenants are breached or a negative liquidity event occurs.  Both are possible outcomes in today's investing environment as most companies are not well situated for handling a long period of zero revenues. (Not zero profits, but zero revenues)