Comments on Recent Market Developments

With the recent drop in the market of ~ 7.6%, U.S. equities have fallen about 18% in the past month erasing most of last year’s rally. It’s not only the percentage of decline that matters but also the speed with which the decline has taken place, i.e. over the fewest days of any correction in recent memory. With our own money invested and tied up in the markets, we feel, understand and sympathize with our clients’ emotional tug of ups and downs caused by this unprecedented volatility.

The arrival of the coronavirus, coupled with the oil shock price war from Saudi Arabia, have combined to weaken trade, production, transportation and other energy intensive economic activities worldwide. In addition, headlines, stories, fears of infection, quarantines, drop in bond yields etc. have taken a major toll on current equity valuations. The coronavirus is a serious threat but, like everything else, it should be considered in context: serious but no reason for a media driven alarming panic!

As often stated in previous market letters to our clients, we are long term investors and as such we take a business owner’s mentality to investing. Long term means focusing on more than the quarter to quarter corporate results or the vagaries of a virus originated panic; it means looking past the peaks and valleys of the marketplace and trying to make the right investment decisions utilizing those principles and methodology that have proved effective and successful for us in the past and that have stood the test of time.

It goes without saying that in the short-term stocks are volatile. Every single day it’s almost a coin flip as to whether they go up or down. Over the course of a year, however, the odds improve dramatically, to over two thirds of the time, in favor of staying the investing course. The odds get even better the longer one stays invested: it’s not timing the market that is important but the time in the market that really matters. Corrections, such as the one we are currently witnessing, are part of the market’s DNA and take place historically every 12 to 18 months and last ~ 4 to 5 months. This one was long overdue and probably no different in duration.

Because we believe history shows that over time stocks spend three times as much time going up as going down, we will endeavor to stay invested in those companies that offer us value (“price is what you pay, value is what you get”) and that can also deliver sales, earnings and dividend growth over time. Companies that are leaders in their fields, have loyal customers for their products, and sell at prices with a good margin of safety. We will also continue to keep some cash available ~10-15% to take advantage of the inevitable corrections that we know take place from time to time and cost average down if necessary.

Finally let’s always remember that historically more than 60% of the market’s best returns are recorded within just a few weeks of its worst days. Since we do not have a crystal ball to know what the market will do tomorrow or the next day, we will slowly and deliberately begin to deploy additional available funds and plan to remain relatively fully invested, as we did during the 2008-2009 bear market. We will leave the folly of panic selling and the madness of crowds to others!