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Coronavirus Updates

Coronavirus Update - 03/20/2020

Dear Clients,

“When one admits that nothing is certain one must, I think, also add that some things are more nearly certain than others.” – Bertrand Russell

Well, I’ve always heard that change is certain! Just two weeks ago, who could have imagined that the World Health Organization would declare a pandemic and a week later our city, state, and country would be systematically shutting down as we all try to prepare for what lies ahead.

As you know, over the last few weeks, I have been communicating with you our thoughts as it relates specifically to the financial markets and the economy. Approximately 4 weeks into this global pandemic, we acknowledge that the economy is going to seriously weaken, and that stock prices are currently pricing in that shorter-term fact. What we believe, however, is that looking out a year from now, the markets will likely be higher, perhaps by a large amount, than they are today. While no one knows when the bottom will be reached, it is a high probability that stock prices will turn well before the coronavirus peaks here in the United States. Furthermore, historically, recoveries from big market drops tend to be sharp, powerful, and unpredictable. Here is a fact: In any decade, if you miss the 10 best trading days of market performance, your return will be paltry. And almost always, these 10 best days are right off the market’s worst days.

Seth Klarman, widely considered to be one of the greatest investors of all time, stated it clearly – “The single greatest edge an investor can have is a long-term orientation.” With the Dow Jones Industrial Average down well over 30% already in just 4 weeks, this is perhaps the most important time to maintain a long-term orientation.

Many of you may have noticed some slight adjustments in your portfolio – mainly the sale of small-cap index funds. Our rationale is simple: if the coronavirus damages earnings power over an extended period of time, some small-cap companies do not have the free cash flow levels to withstand that. So, we decided to raise a little cash in preparation to purchase higher quality stocks, many of which are looking increasingly attractive on a relative basis. I should say that we are keeping an open mind to returning to small-cap funds – both international and domestic – in the future.

These times are difficult for everyone. However, as the above quote from Bertrand Russell implies: “there are things that we can be more certain of.” And this, yes, we can be certain of: the coronavirus will eventually end, life will gradually move back to normal and high-quality stocks will resume their place as the greatest wealth creating vehicle known to mankind. I am grateful for all of our clients, and we will continue to assess market conditions while looking for growth opportunities we believe are becoming increasingly apparent.

We truly think of our clients as family here, and as such, you are in our thoughts and prayers. Please stay healthy and safe during this time.

This too shall pass.

Best wishes,

James C. Burns, CFA

Coronavirus Update - 03/12/2020

Dear Clients and Friends,

This seems like a bad version of the movie Groundhog’s Day!

For the third straight week, markets have continued to decline over the global spread of coronavirus. Cases are now confirmed all over the world, including here in the United States where major sporting events and gatherings have been cancelled. The ripple effect of this will have a significant effect on both society and economic activity for the next few months.

The market is obviously worried, and pricing in a very bad case scenario. As I have said before, nobody really knows what is going to happen in the short term. However, I would like point out a few things that we should keep in mind:

1. The vast majority of the companies in your portfolio are cash rich, with healthy balance sheets, low debt, and solid long-growth profiles. These are world-class, best in breed businesses that, while down, will almost surely come back strong. As an old Wall Street saying goes: “In bear markets, the good stocks go down, bad stocks go down, but the good ones always come back.”

2. As I mentioned last week, we spend our time here reading, researching, and evaluating all kinds of information as it relates to the economy and financial markets. I place a lot of value on sober minded investors who have outstanding reputations and long-term outlooks. That may be why I seem to frequently quote Warren Buffett. In fact, this week, Buffett called the recent stock market shock: “…a one-two punch” referencing the coronavirus and the plunge in oil prices…but stated that the market collapses we saw in 1987 and during the 2008 financial crisis were “much more scary, by far…” As we all know, in both 1987 and 2008 crises, the market eventually had a powerful recovery with tremendous wealth creation for those who stayed the course.

3. Finally, history shows that the stock market comes out of scary and violent declines such as this, with a sharp, almost V-shaped pattern. Of course, we don’t know, but below is a chart from similar health scares and corresponding market declines/recoveries.

Hey, let’s be honest – this is tough for all of us! However, it is our view that the coronavirus is a painful – but temporary – “black swan event”. Importantly, we believe the Federal Reserve will continue to provide monetary support and a large Federal stimulus program from Congress is likely. Furthermore, we continue to believe that staying the course is the best approach at this time. As always, we are monitoring events carefully and will keep you abreast of market action and our thoughts as things unfold.

Best wishes,

James C. Burns, CFA

Coronavirus - 03/06/2020

Dear Clients and Friends,

Over the last week, the coronavirus has continued to spread and markets have remained volatile as investors are concerned over its negative impact on global growth. Part of our job as your investment advisor is to always be reading, researching, and evaluating what is really happening with your companies, markets, and the broader global economy. In a nutshell, separating the wheat from the chaff.

J.W. Burns & Company gets significant reams of research from various platforms and institutions. Below is a link to an outstanding piece sent to us by Applied Finance Capital Management that indeed separates the wheat from the chaff. Although from Monday, it provides real facts, rational thinking, and reasonable expectations based on previous major economic shocks. It is quite long, but we have highlighted what we believe are some of the key points for your convenience. Overall it is a well-written article with factual information that is set against some of the hysteria in the news media. I thought you might find it of interest.

I have also included two graphs from Bloomberg, that puts the intensity of this disease in perspective.

We are monitoring this situation carefully and believe that some of the selling may be overdone. Rest assured, we are on it.

Best wishes,

James C. Burns, CFA

Coronavirus update - 02/28/20

Dear Clients and Friends,

As we all know, the recent global outbreak of coronavirus has created a swift market correction. Over the last four trading sessions, the Dow Jones Industrial Average has fallen more than 3,000 points, more than wiping out its impressive early gains to start the year.

My first response to the sharp decline is that we should strive to be steady and not speculate on short-term outcomes. The truth is, the stock market is responding in a very rational way. The earnings expectations of 2020 for S&P 500 companies were in the range of 9-12% growth. With the outbreak of the coronavirus and the corresponding negative economic impact, earnings expectations are already coming down, and the broad stock market is repricing accordingly.

As I have stated in the past, it is helpful to remember that stocks go down a lot faster than they go up and that every correction or bear market has its own unique – and frightening – reasons for decline. This catches many investors by surprise and can scare them out of their long-term investment plan. Part of our job here at J.W. Burns & Company is to help our clients stay the course and keep things in perspective.

In fact, I believe no investor should be that surprised by the current repricing. The S&P 500 Index was up over 30% last year and just over 5% to start the year by mid-February. That level of straight, upward momentum will eventually correct, and the spread of the coronavirus has been the triggering event. Furthermore, as I stated in January’s newsletter, clients should expect heightened volatility in stocks after the smooth, powerful returns of 2019. As a wise investor once said, “You can’t have it one way all the time.”

Like everyone else, I don’t know anything more about the coronavirus than what is on the news. And investors right now are very sensitive to the headlines. Generally, I agree with Warren Buffet’s comments last weekend when he said that something besides the coronavirus will probably be front and center for investors six months from now. Only time will tell.

We are carefully monitoring this situation and observing what trends are taking place in the market. What we have noticed is that our stocks, while down, seem to be hanging in there fairly well. You own a collection of businesses that are among the very best in the world with durable business models and wide economic moats. We are focused on the long term and are using this decline to sharpen our pencils and assess what businesses we may want to trim, sell, or add/increase positions in.

Again, we remain flexible but believe it is quite unwise to make big changes to a carefully crafted, growth-oriented portfolio based on what could happen. The truth is, we don’t know. Nor does anyone else.

Going forward, the headlines will be scary and the markets may continue to struggle – for a while. However, we are confident that this is not the last we have seen of this bull market and that market’s “fever” surrounding the coronavirus will eventually break. Stay calm.

Have a good weekend.

Best wishes,

James C. Burns, CFA