The market reaction to the vaccine shows the value of contrarian thinking

Moderna's research has cheered investors

(Image credit: © Boston Globe via Getty Images)

published 17 November 2020

Yesterday, we got news of another Covid-19 vaccine.

This one is from Moderna. It uses a similar method to the Pfizer/BioNTech one but appears to be even better. It offers nearly 95% protection. And it doesn’t need to be stored at massively sub-zero temperatures.

The usual caveat – this is early data. But it’s more good news and another sign that we’re getting there. Moderna wants to get regulatory approval in the US in the next few weeks and it hopes to have up to a billion doses ready for use next year.

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(By the way, our very own Matthew Partridge tipped Moderna way back in April, as the coronavirus was raging around the globe. The share price has just about doubled since then. That’ll have more than paid for a subscription to MoneyWeek for any readers who took advantage. If you don’t already read the magazine, you can get your first six issues free here).

The market reaction was understandably cheerful. It was basically a less exuberant version of what happened when Pfizer mentioned their vaccine.

It gives a good pointer as to what’ll happen once we’re free and clear of this virus. The “recovery” trade is already starting to be priced into markets, but the sorts of stocks and assets that are benefiting have been so despised for so long – banks and oil, need I say more? – that I suspect there are a lot more gains to be had as and when confidence in the recovery accelerates.

The value of contrarian thought

What’s most interesting here to me is not so much the excitement as the trepidation. The news of the Pfizer vaccine was greeted with much joy. But almost immediately, fear set in.

The results seemed hard to argue with. So immediately, the pessimists started to argue (on the flimsiest of survey evidence) that not enough people will take it. Others rushed in to tell us all to calm down, as though we might fling open the door and smear ourselves on the nearest neighbour in an unseemly rush for freedom.

There are lots of reasons for this caution, some of it well-meaning, some of it plain, old self-important control freak-ery.

But underlying it all is a simple psychological reality: the capacity of human beings to become accustomed to the unthinkable is quite staggering. It’s a useful survival trait, but like most survival traits, it’s a double-edged sword.

We have a tendency to assume that tomorrow will be like today. So we’ve gone from finding it hard to believe that our economies could ever be shut down, to struggling with the idea of them ever reopening.

This human tendency to get surprisingly quickly used to the present and to extrapolate it far into the future is one of the reasons that momentum investing (buying what’s going up, and selling what’s going down) works so well. People keep betting that what worked today will work tomorrow.

This compounds with our herding instinct – we don’t like to disagree with the crowd, because the crowd might turn on us (spend five minutes on Twitter for proof). And this is all made a lot more instinctive when issues such as life or death, and hygiene, are thrown into the mix.

However, the tendency to extrapolate is the reason that contrarian investing (buying what's utterly detested) works well too. Because, eventually, it turns out that tomorrow can be different to today. When that happens, the cheap out-of-favour stuff can make an extremely rapid comeback.

So, you honestly don’t have to think that far outside the box to be more imaginative than your average investor. And if you can do that – if you can envision a world of tomorrow where the assumptions of today turn out to be wrong – then you’ll be able to position your portfolio to take advantage of events that surprise the wider market.

(And if you’re interested in reading more on the psychology of this stuff and what it means for your investment strategy, I released a book about it last year – The Sceptical Investor.)

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.