Investment Memo March 2020 - 'It's Better To Keep Your Mouth Closed And Appear Stupid Than Open It And Remove All Doubt'
Summary
- I wouldn't be surprised if we see even more volatility in the stock market in the coming weeks as Americans move from a rational and distanced mindset to becoming more emotional and fearful.
- tourism will temporarily to a degree stop, schools will cancel their graduation parties, oil prices will fluctuate and the healthcare system will once again be tested.
- It took me about 9 years in the equity market before I understood that news and market commentators don't want the best for you.
As I'm writing this investment memo, the world is fighting against yet another crisis. This time, it's a virus named COVID-19, which is spreading supposedly faster than any before, causing global fear and panic. Words such as pandemic and recessions keep popping up frequently in my feed.
I will admit this: I have been in the "chill the fuck out" crowd for the last few weeks. But now that there is a decent chance that my family has COVID19, my perspective has changed a bit. And so will my actions. I won't be alone on this shift" @Uncle Rico
I wouldn't be surprised if we see even more volatility in the stock market in the coming weeks as Americans move from a rational and distanced mindset to becoming more emotional and fearful.
Yet, the fact is that we know little about the true effects on the stock market of a pandemic, as shown in Fidelity's paper on the effect on the stock market on past pandemics.
They even conclude that:
We cannot draw any fixed conclusions about the effects of pandemics upon stock-market performance. Equity markets react unpredictably to the unknown; nevertheless, such events should not be examined in isolation but viewed in common with other prevailing market conditions. In investment terms, it is hard to mitigate the effects of events such as pandemics or war. At such times, investors should remember the benefits of long-term investing, as demonstrated in the following chart of the S&P 500 Index"
What they're saying is that over the long-term, as you can also see in the graph below, is that there is still no reason to believe that equities as an asset class will stop to rise. Yes, tourism will temporarily to a degree stop, schools will cancel their graduation parties (my brother-in-law in Japan, unfortunately, experienced this), oil prices will fluctuate and the healthcare system will once again be tested. But, even though it might seem so right now, the world is not going to end this time either. Within a few years, this too will go in the books of history and we shall worry about a new problem.
And that's the nature of investing. You have to be able to deal with the unknown and sticking through it. That's the rule of the game.
The whole reason stocks tend to do well over time is because they make you put up with stuff like this. Cost of admission, feature not a bug @Morganhousel
The key to dealing with events such as this, if you want to be a rational long-term investor, is to stop trying to sound smart and informed. I know it sounds weird, but you are not doing yourself a favor by acting as a medical expert while sitting in your underwear and tweeting insane statistics.
You simply need to deeply accept that you don't know the outcome of this event, as no one ever has in times of turbulence, and that's best to accept volatility and move on with your daily life.
What we don't know outweighs what we do know at this time. We aren't going to look into the crystal ball that none of us have." CEO of GE
Aker Capital wrote a fantastic piece about staying passive called the art of not selling which profoundly resonates with me.
We try hard to tune out concerns about politics and the economy. We read the newspapers, and we work just down the road from Washington D.C. However, it has been our experience that we are at our worst as investors when we allow concerns about these issues, including elections, trade wars, and Fed policy, to influence our investment decisions.
It took me about 9 years in the equity market before I understood that news and market commentators don't want the best for you. They want to play you, to find your weak spots such as fear and greed until you need them to feel informed enough to have an opinion.
Moreover, whom are they do tell investors what to do? Until I'm proven otherwise, my standpoint is that wise investors don't tell others what to do with their money, but rather accept that they are not equipped with an answer at all times.
Knowing what you don't know is more useful than being brilliant - Charlie Munger
It might seem like there's much value in talking macroeconomics, but as I talk to more and more top-performing asset managers with a long-term horizon about this topic, I see that the best investors don't care too much about macro events.
Why? Because there will always be a reason to sell if you extrapolate current news and try to create a bearish scenario.
Just look at the graph below. Surely, at all of these times, it would have felt like you needed to act. Something needed to be done.
Yet, when we have the facts, all you needed to do was to sit tight and believe in your conviction (which I'm assuming is grounded in analytical work where your investments, what they do, their pipeline, etc.).
Assiduity is the ability to sit on your ass and do nothing until a great opportunity presents itself - Charlie Munger
Do great opportunities present themselves?
As I do my analytical work, using DCFs, multiple valuations with P/E, P/B, EV/EBITDA, and the yield theory, I find that most holdings which I find interesting are now trading at a 0.95 - 1.10 in price/fair value. As such, many of the high-quality firms I aim to own and add to over time are now fairly priced, but they are in no sense a bargain as news portrays.
When the market is truly a buy, you won't want to buy it! @biancoresearch
That does not mean that I'm not going to buy equities. I will. But nothing more than what I normally do. In pieces, as we go down.
With that note, let's end with a trick to skip the CFA exam and yet make tons of money in the stock market.
The golden rule of investing goes as follows:
When assessing if the market is a screaming buy or not is to listen to your mother. When she starts talking about the market, you'd better start buying with both hands - Unknown
Most likely, we will hear more frightful news in the coming weeks. Try then to remember the famous words of Mark Twain
It is better to keep your mouth closed and let people think you are a fool than to open it and remove all doubt.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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