Well, that was one awful week that we just had, for much of the world, and certainly in financial markets. I know I feel like I aged a decade this week. The stock market has been increasingly worried about this Coronavirus over the last few weeks, leading to increased volatility and large selloffs. This, combined with the collapsing of the oil market by Saudi Arabia and Russia, created a period of absolute panic.
This was a type of panic only seen a few times in market history. The major comparisons are September 2008, when Lehman Brothers was allowed to fail, September 11th, and Black Friday 1987. Before that, we are talking Great Depression. Liquidity dried up in many areas, especially fixed income. Volatility has more than quadrupled and is close to all-time high levels. Over $5 Trillion in wealth was eviscerated in just a few days, if not hours. This has been by far and away the most rapid bear market in history; and at the lows last week the market had dropped nearly 30% in 16 days.
For long-term investors, we know that bear markets and recessions are an inevitability. It is the severity of this decline that was bone-jarring to say the least. If you look at these periods of panic and think of dollars lost it can drive you crazy. Remember that the stock market moves much more rapidly than business values. Keeping an anchoring on the intrinsic values of the companies that we own can help, but I realize that is easier for me since I’m doing that analysis. The intrinsic value of the securities we own is far higher than current prices and this is our best opportunity to make a ton of money since 2011, when people thought European countries were going to go bankrupt!
The calls that I’ve been getting have been mostly people looking to add money. A common question is, do you think this is the bottom? I have no idea, but even if we lose 10-15% over the next month, but end up making 50-100%, over the next 3 years or so on some of these bargains, that is a heck of a return. In times like this, market participants are selling indiscriminately. Fund flows are showing that many of those proponents of index and passive investing, have been selling in spades as they see what fear looks like. That is market psychology for you, and it is extremely predictable. Just try to go to Costco at opening time and you’ll see clear evidence of crowd psychology, with extensive lines to buy dozens of rolls toilet paper and bottled waters…(taps will still work, not a hurricane, but you get the point).
Now Main St. is seeing how much this virus is going to change everyday living for the next month or so. The stock market looks forward, which is why we have seen so much selling over the last month. The buzz is around social distancing to reduce the rate of new infections, as to not overcrowd our healthcare system. This is a very sensible approach, out of a few limited options, none of which are desirable or easy. This clearly will have major economic consequences. The people who can least afford to lose jobs are often the hardest hit, particularly in the tourism and service industries. Many small businesses will struggle to stay afloat if this quarantine lasts too long. There is a balance between taking these health measures and hurting the economy too much. The most at-risk are the elderly and those with preexisting conditions, so my hope is after this initial phase of trying to lower the rate of new infections, we target those groups specifically, and get back to normal life again.
Think about the opportunity that we have right now from an investment perspective. The world is going to endure a few months of struggle, no doubt. However, many of the greatest businesses in the world are now being offered on sale for 25-50% off their normal prices. In fairness, the market was pretty expensive going into this, but relative to bonds, goodness gracious, this is a heck of an opportunity.
One can look at short-term mark to market losses and panic, based on a worry that things could fall further, which they always can. But the reality is that, the investment risk is much lower when prices are at bargain levels. Surely there will be dislocations and industries such as energy and weaker airlines/hotels, will be impaired. Banks will see higher credit costs from the exceptionally low levels of the last 5 years or so. The good news is that they were restructured to where they can withstand just about any recession imaginable, after the Great Recession taught severe lessons about capital ratios and liquidity. I don’t see this recession being anything like that, assuming government’s across the globe step in with targeted fiscal support, which is clearly going to be necessary, and seems forthcoming.
According to Barron’s, the S&P now trades for less than 13 times 2022 estimated earnings. This is the price stocks traded for around the lows of 2002, 2016, and 2018. I remember buying Bank of America for $6-7 and Citigroup in the $20’s and $30’s. I remember owning Microsoft in the 20’s and 30’s (sold way too early). Those stocks were available at bargain prices because of anxiety and fear.
If you believe that this Cornavirus is going to conquer the globe and America, this is not a time to invest. I’m going to bet on America and humanity to be able to beat this back. We will take losses, and there will be pain from a human aspect and financial. I feel terribly for elderly that may feel isolated, and it is sad that our kids are developing this sense of fear from the hysteria surrounding this.
Remember after September 11th, that feeling of patriotism? People went out to restaurants and bars, and celebrated life and the virtues that make this country so amazing. In Italy, people are singing together from their balconies as the country reels from a complete lock-down, which also may be coming to a town near you very soon! https://www.youtube.com/watch?v=jx-4pyU3XD0&feature=youtu.be&fbclid=IwAR3lv2v1EEAZz5wzsx3oVeOL6_Hu6K37aOmhclVP58wPiUHFl70ELaugZ1E
This is a global crisis and I have to believe there will be a major sense of relief once we get past the turmoil, and this will be good for everyone, including stocks!
The first quarter of 2020 has been the worst and most stressful of my career, without a doubt. This is not an uncommon sentiment in the industry. As a sign of my conviction, I’m tapping into my home equity to buy into these bargains. If Mr. Market wants to sell me AIG at $25 per share, or less than 45% of tangible book value, I’ll take it. I’ll take ALLY at 65% of tangible book value, or 5 times earnings. Berkshire Hathaway right around book value, sounds darn good to me. Some of these industrial companies are looking immensely compelling at low double-digit multiples of normalized free cash flow. Great technology companies such as Alphabet and Applied Materials are going for very reasonable valuations once again. We are going to make some adjustments from time to time, selling stocks we like, for ones we like more at current prices.
Am I looking forward to the next week, or next month…. not really. It is going to be rough but we will get through it, and I believe we’ll end up thriving after a rough start. Don’t let fear get in your way. Thursday was the biggest selloff since Black Friday….think about that! Bigger than any day during the Financial Crisis. The Fear and Greed Index is at a 1, meaning peak fear. The very next day, the market rallied over 9%. There will not be a flashing sign telling us that the market is ready to take off. It happens so fast. If you bail out too early you are bound to miss it and you end up chasing things. The big gains are made early. Wise investors say, the big money is made in bear markets, you just don’t know it when you are buying. Take a two to three year perspective minimally, and it is exciting to think about what can be accomplished now.
I’ll end it with this. Professional fighters always talk about the tremendous anxiety they face before a big fight, which is of course so natural. Then when the fight actually starts, there is a huge sense of relief. Markets look forward. We are now embarking on the fight against this pandemic. As fear subsides, watch out for the relief rally!