By Nick Fisher, Portfolio Manager
We have been consistently telling our clients for the last 18 months this is a difficult environment, do not expect returns like those of 2016 and 2017, and volatility is likely. Well, I guess we got what we wanted. There is an old saying that the market takes the escalator on the way up and the elevator on the way down. This has certainly been true in 2020.
It’s important to document and learn from your thought process as markets can change rapidly. In retrospect, we have done a good job of that. I plan on recapping much of the good, bad and ugly in our upcoming quarterly newsletter.
Our general stance has been: 1) We are not super excited about the future returns that we forecast in the market. 2) As a result, we own a lot of safe, conservative assets that perform well when markets decline. 3) We welcome a “major” correction in order to put our conservative capital to work and earn better future returns. 4) We expect the risk assets that we do own, although volatile, will still earn a reasonable return over the next 10 years.
The Covid-19 virus has exposed the weak economic growth we started experiencing in late 2019. It is likely as we write this that US economic growth will turn negative in short order and earnings for many US companies will turn negative. This is a recipe to create meaningful volatility for some time, as we have seen.
We have no expertise in picking bottoms, but we will likely be buying in small increments as the market falls and as the market begins to recover. These small but significant activities will sow the seeds for future returns. In general, we are focusing on companies that we believe have strong balance sheets and may be able to take advantage of growth opportunities as we deal with this dislocation. This is how we think and we like when leaders of companies that we own think the same way.
I will leave you with a reminder. In Warren Buffett’s 1987 letter to Berkshire Hathaway shareholders, he talked about a character called Mr. Market:
"He [Ben Graham] said that you should imagine market quotations (stock prices) as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions, he will name a very low price, since he is terrified that you will unload your interest on him.
Mr. Market is there to serve you, not to guide you."
When Mr. Market is depressed and can only see trouble ahead there is no recognition or understanding of the business, only the emotions surrounding it. Hundreds of years have proven that this is not the best way to invest or live your life for that matter.
No one can pick the top or bottom of the market, but for the trained eye it is obvious that occasionally Mr. Market is being overly optimistic or overly pessimistic. We are here to help you on your investing journey, make sense of Mr. Market’s incurable emotional problems and to keep your portfolios on track amid turbulent markets.
Nick Fisher, Portfolio Manager