'The disaster in Nepal reminds me of my Kashmir escapade...'
(Apr 28, 2015)
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The news of the massive 7.8-magnitude earthquake in Nepal came as an unnerving jolt to me. It took me back to the time when I had a narrow escape during the devastating Kashmir floods last year. Having experienced a natural calamity first hand, I know how it feels to be at ground zero. The illusion of normality, stability and permanence cracks wide apart. And you know when you are treading the thin line where one wrong step, one bad choice could mean the difference between life and death.
As I read through scores of news reports on the disaster in Nepal, I came across some very shocking facts. And I felt a strong urge to share my two cents on the issue of such extreme events...
As the various news reports suggest, more than 4,400 people have been declared dead already. The number of people injured by the calamity is about twice. The Prime Minister of Nepal has said that the death toll on account of the earthquake could hit the 10,000-mark... He has also admitted that the rescue, relief and search operations have been 'ineffective'.
The ill-effect of the calamity is not limited to the ones who have died or injured. As per the United Nations, the massive earthquake has impacted the lives of 8 million people in 39 districts. This is more than 25% of the country's population. Of these 8 million people, 2 million reside in the 11 severely affected districts. In rural areas, 90% of the people have been affected.
Many people have lost their homes and livelihoods. There seems to be an acute shortage of water, food and medicines - the basic essentials. And to add fuel to fire, the people have been further terrorized by over 60 aftershocks, rain and cold.
For the ones that have survived, a massive national crisis has only begun. The road to recovery is going to be a long, winding path.
As per the US Geological Survey's best estimate, the aggregate economic losses from the disaster could be between US$ 1 billion to US$ 10 billion. For Nepal, which is one of the poorest countries in the world and has an unemployment rate of over 40%, this crisis could set its economy back by a decade or more. The damage to the country's infrastructure has been huge. Rebuilding homes, roads, highways, hydropower dams and generators would take years.
The one big question that keeps repeating in my head is - Why does a natural calamity have to become such a large scale human tragedy?
Someone may say that the earthquake is a natural calamity. What can we do about it?
Well yes, we cannot prevent an earthquake. But can we not be well-prepared to face it?
Consider these facts... As per Down To Earth magazine, Nepal lies in one of the most geologically vulnerable regions. In fact, Nepal has had a long history of earthquakes. Particularly, the ones that occurred in 1255, 1344, 1833, 1866 and 1934 were highly devastating.
What more, some scientists have been anticipating a 'great Himalayan earthquake' (earthquake of magnitude 8 and above) for quite some time... While the recent earthquake does not qualify as a 'great earthquake', experts are not surprised by the calamity.
Remember, calamity is one thing and devastation is another. We cannot stop a calamity from occurrence. But devastation, surely, can be minimized. According to seismologist James Jackson, who was part of a 50-member team of scientists and researchers, the devastation following the earthquake was long feared, not because of the seismic activity, but because of population pressure and degradation of the environment.
What if such a massive earthquake hit one of India's metros?
The devastation in Nepal clearly shows how big a cost the country has to pay for being unprepared for a natural calamity. I came across some Indian statistics that may seem scary.
As per Business Standard, at least 38 Indian cities are located in high-risk earthquake zones. A majority of the constructions in these cities are not earthquake-resistant.
Since 1988, India has had five moderate earthquakes. In fact, four of the great earthquakes (Richter magnitude 8 and above), have occurred in India over the last 115 years.
Can you even imagine the magnitude of destruction that could happen if a similar calamity befell upon Mumbai... or Delhi... or Bangalore today? Are our cities well-equipped and prepared for disaster management? Is your residential building earthquake-resistant?
Understanding complexity, non-linearity and human misjudgment
For an earthquake-prone area, is it not irrational to not be prepared for such an event? Let us explain...
The human brain has a natural tendency to look for patterns and repetitions to understand and respond to reality. For instance, every day when your doorbell rings at 7 am, you immediately know that it is the newspaper delivery boy. The sound of the door bell at the given time signals your brain that a pattern is being repeated. That's how you know who is at the door and you respond accordingly.
This is a linear thought process. It is quite useful. It helps us deal with the myriads of chores and tasks that we perform every day.
But it also has serious limitations... How would the linear thought process deal with complex systems such as earthquakes and financial crashes? Earthquakes are rare events. They do not happen at fixed intervals. On the other hand, the non-occurrence of the earthquake emerges as the repeating pattern. So the brain takes this pattern as the reality... as normality... and eliminates the possibility of an earthquake. This is broadly how we blind ourselves from seeing rare, high impact risks.
This happens in the stock markets too... When we see the markets rising higher consistently, the brain identifies it as a repeating pattern and adapts its decision-making process accordingly. As such, rising stock prices result in more investor interest and push stock prices even higher. Then, of course, the markets correct and investors become panicky.
Value investing is earthquake-resistant
The value investing legends such as Ben Graham, Warren Buffett and Charlie Munger have known very well that 'earthquakes' do happen in financial markets. And that, such extreme events cannot be predicted or timed.
So what should one do?
Invest in such a way that 'financial earthquakes' do the least damage to your investment portfolio. This means investing in quality businesses that have the capacity to absorb economic shocks. Look for companies that have a solid, scalable business, a history of consistent profitability, low leverage and high returns on investment. Lastly, never overpay. Yes, sometimes it does make sense to pay a slight premium for high quality companies. But just don't overpay because the stock is a market favorite and nobody seems to be caring about valuations.
This is precisely how Buffett has made his billions. And saved himself from losing those billions...
My sincere prayers and empathies with all the lives affected by the Nepal earthquake...
May you be safe and successful!
Managing Editor - Hidden Treasure
What is your view about the crisis in Nepal? Do you think it is high time that India prepares itself for averting such large scale human tragedy? How do these events influence the way you think and invest? Let us know your comments or share your views in the Equitymaster Club.
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