The Bad Stocks Are the Most Fun

Here’s a story you could tell about the last few months in the stock market, and the next few months. A deadly pandemic occurred and shut down much of the world. Investors worried that all the companies would go out of business, due to a combination of economic losses and financial panic: The companies wouldn’t have any revenue, their creditors would refuse to fund them, and they’d go bankrupt. But then things turned out not to be so bad. A financial panic was averted by quick and comprehensive government action, companies actually had a pretty easy time getting credit to stay afloat, and the bankruptcies were averted. The economy will reopen, revenue will bounce back, everything will go back to being how it was before. Financial conditions kept companies afloat until the economy could recover, and now it will recover and they’ll be fine.

I do not especially mean to endorse this story but it does seem to fit the stock market, which went down a lot and then up again a lot. (The S&P 500 index peaked in February, then fell 34% by March 23, then rose 44%; as of yesterday’s close it was up a bit year-to-date.) And if this is your story, it is the story for almost every company: The most important fact for any given company is not its particular business model or execution, but the pandemic. There are some exceptions, some companies that weren’t really affected by the pandemic, or even benefited from it; this is not the story of Zoom or Slack. But the companies most obviously harmed by the economic shutdown—cruise lines, airlines, non-essential retailers, WeWork—are the ones that went down the most and will have the sharpest recoveries, so if this is your thesis you should buy them indiscriminately. “Everything will be back to normal soon” is an argument for buying the stocks that went down the most.