My wife’s family lives in Clarence, NY, about 10 miles east of downtown Buffalo. We sat in their house for Christmas as 4 feet of snow and consistent 50-70 mph winds snow-globed the world around us.
Buffalo got crushed by this storm. But probably NOT in the way you think.
Because you’re probably thinking, “It’s the snow. That’s the problem.” Four feet of snow sounds unimaginable. How can society function?
But we’re used to deep snow in upstate NY. We’ve always had “lake effect” snowstorms blowing in from Erie and Ontario, and we’ve built the infrastructure to deal with it. We have plows to clean roads, salt to melt ice, snowblowers and shovels and commercial snow-clearing businesses to keep our homes, sidewalks, driveways clear, etc.
Don’t get me wrong. Four feet isn’t nothing. But give us a day to clean up and we’re back to business as usual.
The substantial difference in this “Christmas Blizzard of ‘22” was the wind. Weather stations all over Buffalo recorded hurricane-force winds during the storm. That wind changed everything. We took the video below from my wife’s family’s yard on Friday, December 23.
Wind-blown snow turns visibility to near zero. For hours, we couldn’t see the house across the street from us…perhaps only 200 feet away? Well…what’s the problem with not seeing your neighbor’s house?
Roads. That’s the problem. Zero visibility cripples roads and, in turn, cripples the community.
Imagine driving with a white, frigid blindfold over your windshield. And what if that blindfold keeps up for hours? Or days? You can’t keep driving in that – it’s so dangerous! But you can’t stop driving either! If you stop, you’ll block the road for other drivers, assuming they even see your car in the whiteout.
So you’re crawling down the road, barely seeing anything, as the snow depth grows around you. Unless you have a powerful car with “snow tires,” you’ll eventually lose traction and get stuck. Your choices, then, are to stay inside your car – a scary proposition in near-zero temperatures – or abandon the car and venture into the blizzard on foot. Your life is now in danger.
The snowplows can’t see either. They stay home until the weather clears. The road conditions stay bad and grow worse.
99% of Buffalo’s problems were directly tied to road issues. Even the most important vehicles – ambulances, fire trucks, utility trucks – couldn’t drive on the too-snowy, zero-visibility roads.
Many Buffalonians (including me, to some extent) learned a face-punching reminder of the importance of functioning roads. The Romans, it turns out, were on to something. I take roads for granted. This past weekend gave me a newfound respect for them.
But let’s say you’re snowed in at home and don’t care about the roads. You’re warm and well-fed with a 24-pack of Buffalo’s favorite Labatt Blue in the garage. Despite your relative luxury, you still have major concerns.
- What if the power goes out (it’s windy, remember?). Utility trucks can’t reach your house until the roads are clear. My in-laws’ street wasn’t plowed until Sunday at 7pm. The storm started Friday morning. Are you prepared for days of no electricity?
- And what if your home heat is all electric? What are you going to do when your house temperature drops? Will you be safe in the cold? What about the pipes in your house – they’ll freeze if you’re not careful.
- What if your medical needs require electricity? I hope you have a gas generator to provide emergency electricity.
- What if you run out of food? The stores are closed. Even if they were open, how are you getting there?
- Or what if you have a medical emergency. Erie County (where Buffalo sits) announced during the worst of the storm that emergency services were inoperable. No police, no fire, no ambulance. It was too unsafe for them to drive. Have you ever experienced that situation? I don’t think I have.
This blizzard reminded all of Western NY how our societal infrastructure is delicately interlinked. We saw, to borrow an investing phrase, the correlation of outcomes going to 1.
Correlation? It’s easiest to explain this idea through examples. Under normal conditions, the following ideas are completely unrelated:
- The efficiency of a Wegmans supermarket
- Your great-uncle’s heart condition
- The worn tires on your Toyota
- The near-empty gas canister in your garage
- The old maple tree on the side of the house
But when a blizzard chokes out society’s infrastructure for three days, formerly uncorrelated ideas can share remarkably similar (and bad) outcomes.
A tree branch falls in the wind and knocks out your power. Without power, the fridge dies and your food spoils. Just when you need food most, the local grocery store shuts down. You need to go find food, so you start to clear your driveway. You run out of gas for the snowblower. You start shoveling. Then your great-uncle has a heart attack while helping you (it’s all too common). 911 isn’t responding, so you drive him to the hospital. Your car doesn’t come close to gripping the roads. Things get worse from there…
Everything goes bad all at once, and it’s all tied back – or correlated – to the same blizzardy root cause.
Financial markets have a similar idea. It’s long been said, “during times of crisis, correlations go to 1.”
We saw it, for example, in March 2020. COVID created an uncertain future and investors everywhere ran for the exits. Sell, sell, sell. Stocks, bonds, commodities…everything fell in price at once, driven lower by panicky selling pressure.
Why would wheat futures ever behave in lockstep with NVIDIA stock? There’s no causal relationship between the two, except for a global crisis. That global crisis, by definition, ties everything together.
But Jesse – this Buffalo blizzard, or COVID, or any other example you want to use…these are black swan events. Nobody could have seen them coming. [PS – check out lesson #11 here for my original intro to black swans]
I disagree.
You can’t plan for an alien invasion. That’s a true black swan.
But a blizzard in Buffalo, NY? You can plan and prepare for it. Your preparations might fall short. At a certain storm intensity, there’s only so much a puny human can do. You can’t keep your street clear or prevent a tree from falling on the power lines down the street.
But you can stockpile extra gas for the snowblower. You can own a generator for emergency electricity or a woodstove for emergency warmth. You can fill the pantry with enough non-perishable goods to survive a few days. You can keep your body reasonably fit, just in case you have to shovel snow for an afternoon.
You can plan a little more margin than you’d typically need in case your storms are a little worse than you’re typically used to.
Correlations don’t go to one forever. The snow and wind will stop, the roads will clear, and normal uncorrelated life will resume. But only if you survive to see it! Margin helps you survive.
Similarly, you can plan for market crashes or even for natural disasters that rattle entire economies.
A constant theme over my past 4 years on The Best Interest is that diversification is the simplest and most effective measure for preparing and planning for market downturns.
Yes, there have been periods in market history where “correlations went to 1,” and all assets in a diverse portfolio decreased at the same time. But, much like a blizzard, those correlations eventually break.
Concentrated or levered portfolios die in those scenarios. They don’t live to see the other side. No recovery, no thaw. They’re dead.
Diverse portfolios bounce back (even if the diversification briefly “breaks” during the worst of the disaster).
Practically speaking, the Buffalo Blizzard reminded me to beef up my emergency prep at home, to respect our roads, and to remember that Mother Nature still calls the shots.
But for my investing brain, the blizzard was another reminder about the power of diversification – preparing for bad times before they inevitably occur. The next storm is always coming.
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-Jesse
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