By Jerry Wagner I never liked the concept of people being referred to as part of a herd. Yet it has become pretty common in the media. Of course, the latest use of the term is in the phrase “herd immunity.” It’s hard to open a newspaper (remember them?) or a web page without a story about herd immunity showing up. It’s not just a public health matter, either. This week, Michael Gapen, chief U.S. economist with Barclays Investment Bank, stated that he watches the COVID herd immunity numbers very carefully. He calls it “the number one most important assumption [affecting] where the economy is going.” What is herd immunity? The phrase “herd immunity” was used by veterinarians in the early 1900s and was applied to humans in medical articles written in the early 1920s. It is simply the concept that once the percentage of immune people in a population achieves a high enough level, the infection to which they are immune will die out and not infect the remainder of the uninfected population. The application to the recent pandemic is obvious. Herd immunity is especially important because many people cannot be vaccinated for health reasons and others will not be vaccinated for other reasons. Herd immunity is a way for society to help these people. It also means that the faster herd immunity is attained, the less chance there is for variants to develop as a result of virus evolution. Immunity by “injection or infection” Given the importance Gapen attached to herd immunity in his interview, I was disappointed by the numbers that he associated with calculating it. He only focused on the percentage of the population that has been vaccinated by at least one shot of one of the Project Warp Speed vaccines. The key to herd immunity is determining what constitutes “immunity.” As any textbook on epidemiology will tell you, in this context, immunity is achieved by either natural infection or vaccination. In other words, it’s accomplished through infection or injection. Therefore, to truly calculate the herd immunity you need to combine (1) the percentage of people who are vaccinated and (2) the percentage of the population that has already been infected by COVID. Yet the media fails to do this. The latter statistic is hard to find. Google it and the front page results give you other COVID percentages but not that one. “Blind spots” of herd-immunity analysis For some reason, the focus currently seems to be solely on vaccinations. I suspect this is to bolster the efforts to get as many people vaccinated as possible. Yet it eliminates a lot of people that should be counted. And their omission from the dialogue has important policy implications. You can’t just continue to talk about vaccine passports, the return to work and play, and the relaxing of restrictions solely for the vaccinated. You need to make provisions for the unvaccinated but infected members of the population, as well. They too carry the antibodies, and they too are not infectious. My wife and I both had COVID and are in that category. We have received one shot, but our antibody levels are now too high to take the second shot without the possibility of some complications. We are monitoring our antibody levels monthly in hopes that we can become “fully vaccinated” someday, but in the meantime, we are infected but not fully injected—left out of most reopening policies. It seems especially cruel to leave out those people who have already suffered the rigors of COVID from the benefits of reopening. And a simple blood test can certify their level of antibodies, which is more than you can ascertain from a vaccination card. Yet no one seems to be taking this into account in formulating reopening policies. Here at Flexible Plan Investments (FPI), we’ve developed a reopening “COVID-free” policy for employees. Those who either have been vaccinated and have a vaccine card to prove it or have a current antibody test to show they have been infected are not required to wear masks or have their temperatures taken to work in the office. Our staff does not have to return to the office at the present time. Most continue to work from home. If they come into the office, they must either participate in the COVID-free policy or wear masks and have their temperature checked. In addition to policy considerations, the failure to account for the once infected in determining herd immunity is important for financial decisions because the percentage of people vaccinated is smaller than the total percentage of people who either have been vaccinated or have had COVID. If herd immunity is the number one issue affecting determinations of “where the economy is going,” then it’s important to focus on the right number. A better estimate of herd immunity I did find one source of the needed information . Two researchers, Jungsik Noh and Gaudenz Danuser from the University of Texas Southwestern Medical Center, have developed an algorithm that takes all of the information on COVID cases and vaccinations from various sources and produces a daily model estimate of the percentage of people vaccinated with at least one dose of the vaccine plus those once infected. It also gives us the best estimate of whether we have achieved herd immunity. To interpret this chart, you have to know that herd immunity is based upon the average number of cases that arise from each infected person. This is known as the base reproduction rate and is denoted by the symbol R O . The R O for COVID has been calculated as between 2.5 to 4. This translates to a herd immunity threshold (NIT) of between 60% and 75%. The dashed line in the chart is for an R O of 3, which requires 66.7% of the population to be either infected or injected to reach herd immunity. The solid gray line assumes the R O is as high as 4, or an NIT of 75%. Despite our having developed the vaccine here in the U.S., you can see that many other countries, led by the U.K., have already achieved herd immunity at the R O 3 level. The U.S. and Canada are close behind. Noh and Danuser also compute the NIT for the various states in the U.S. See how your state is doing: In finance, we don’t have herd immunity—more like herd infection In behavioral finance, herd behavior is a recognized human bias. Going along with the crowd is something that advisers and investors recognize as a constant source of motivation. When stocks are skyrocketing, everyone wants to be in stocks. When stocks fall 30% to 50%, a substantial number of investors want to follow the crowd, saying, “Let me out of here!” They want nothing to do with stocks. This is herd behavior. In these digital times, we have developed unique forms of herd conduct. Lately, it is manifested in the behavior of Reddit and Robinhood investors as they chase after “meme stocks.” I don’t mean by this reference to disparage these investors. Herd behavior can be good … for a while. I love that these generally small investors have come up with a way to take advantage of an anomaly that arises from the heavy shorting behavior of institutional investors. I do wish, however, that they exposed themselves to less volatility and that they had a way to sell that was less like being in a one-exit movie theater when someone yells “Fire!” The benefits of “following the herd” We take advantage of this herd behavior nearly every day here at FPI. A majority of our strategies are trend following. That means they trade off of price momentum. Momentum is simply the price difference between an asset’s price today and its price at some point in the past. If the difference is above zero, the asset price is said to be positive. We follow the trend as long as that difference, that momentum, is positive. We use trend following because it has been a profitable strategy for hundreds of years with a wide variety of assets. In addition, when factor investing was launched, it did not take long for the momentum factor to be discovered. In test after test, it proved to yield the greatest return of all of the Fama/French factors . The advantage of momentum strategies is that they are designed to be invested in long uptrends and move to safety during major downturns. Their weakness is choppy markets, like those experienced in 2011 and 2015, where no medium-term trend exists. Momentum strategies have been very profitable over the last few years as well. Many of our top-performing strategies are momentum-driven. Self-adjusting Trend Following, Market Leaders, Market Leaders Sectors, Low Volatility/Rising Dividends, Lifetime Evolution, Evolution Plus, most of the All-Terrain Strategies, and many more of our investment strategies are trend followers. In fact, anything with “Market Leaders” or “Evolution” in the name is driven by momentum. And there are low-cost QFC versions of all of these strategies that use our subadvised Quantified Funds. Because we have so many momentum strategies aimed at different asset classes and employing different time lags in the momentum formulation, last year we introduced our QFC Multi-Strategy Explore: Equity Trends strategy. In my opinion, this is the best way to trade equity asset classes with momentum. Rather than relying on a single momentum strategy, QFC Multi-Strategy Explore: Equity Trends creates a portfolio of the best performing of our equity trend-following strategies, giving more weight to the top returners in the current environment. Our tests show that this combination can deliver among the top returns in rising markets, while still smoothing the road when traveling through the financial marketplace’s ups and downs. The added level of downside risk protection built into the strategy comes from the fact that all momentum strategies are not alike. They move differently from each other, offsetting some of the bumps along the way. Herd behavior can sometimes turn ugly—like when the buffalo are stampeding through a town on the prairie. But when it comes to momentum investing and herd immunity, history suggests that it is best to be a part of the herd.