“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.
James C. Burns, CFA