“So, first of all, let me assert my firm belief that the only thing we have to fear is...fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. In every dark hour of our national life a leadership of frankness and of vigor has met with that understanding and support of the people themselves which is essential to victory.”
-Franklin D. Roosevelt
Dear Family, Friends, and Clients,
The bull market that began 11 years ago has ended. March 11, 2020 marks the end of the longest bull market in history. It will be at least more than a decade, and perhaps more than a century, before that record falls. Since we have not experienced a bear market in over 11 years, it is important to remember that falling equity prices are a normal part of investing. It does not matter what panic we find ourselves mired in, it will feel like the worst, it will feel like it’s different this time, and it will feel like the world as we know it will never be the same. We have maintained our diligence in following our principles for 11 years as it looked more and more like markets never fall, and while those less careful than us reaped higher speculative returns. It is during this kind of market volatility that our strict adherence to our principles pays its dividend
We must remember that our economic system is incredibly strong and has seen us through various panics and market crashes since the first stocks were traded under the buttonwood tree in New York City circa 1792. Our system has survived a Revolution, a Civil War, a global flu pandemic, two world wars, the resignation of a US President, a terrorist attack that claimed 2,977 victims and now our system will face and outlast the current turmoil. We understand completely that the facts and logic do not make the pain any less when our account balances are dropping, and it feels like selling everything is the only logical response. However, our main role is to support you emotionally, especially when we face turbulence and help you bridge the gap to the beginning of the next bull market.
We do not sell securities on the way down because there is no bell that rings at the bottom. In our experience it is nearly impossible to time the market when it operates solely on psychology. We also do not indiscriminately buy securities just because they have fallen. We continue to follow our discipline on the way down, just as fervently as we do on the way up. We continue to only buy securities trading at discounts to fair value and only buy companies with necessary products and services and a measurable durable competitive advantage. These characteristics have proven to be key in gaining the benefits of recovery and increasing long-term returns over centuries of investment history. We will scale our purchases so that we have the greatest opportunity of deploying the last of your excess cash when we reach the end of the selling. We will not use cash necessary for your living expenses to buy stocks no matter how compelling the prices.
It is important to realize that during a panic selling is indiscriminate. The prices of good companies are just as likely to drop 50% as the prices of bad companies. Our job is to determine which values offer the richest reward and carefully take advantage of them in a manner that does not imperil your chances of long-term success. We will be buying a higher number of securities because we are able to find many more stocks trading at a significant discount to fair value. We may purchase 20-30 stocks instead of the 5-10 that we normally purchase. This increased diversification will buffer the possibility of damage from an individual company that runs into liquidity issues or credit issues. When the odds are in our favor, we are much better served by increasing the number of decisions we make, whereas when the market was high we were better off limiting our decisions since not many securities met our criteria.
I would like to share an excerpt from The Intelligent Investor by Benjamin Graham about a character named aptly “Mr. Market”:
“Imagine that in some private business you own a small share which cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him and the value he proposes seems to you a little short of silly.
If you are a prudent investor or a sensible businessman will you let Mr. Market’s daily communication determine your view as the value of your $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price. And equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.
The true investor is in that very position when he owns a listed common stock. He can take advantage of the daily market price or leave it alone as dictated by his own judgement and inclination. He must take cognizance of important price movements, for otherwise his judgement will have nothing to work on…
…The most realistic distinction between the investor and speculator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell”.
We have the freedom and the privilege of ignoring market prices when they are clearly irrational. We also have the opportunity to take advantage of them. When our fellow investors are panicking because stocks are on sale, our tendency is to help them out by relieving them of the burden of holding great companies at great prices. If your neighbor came over and told you he would buy your house for $500 you have the luxury of laughing at him and turning down his clearly insufficient offer; if the same neighbor offered you $2,000,000 for the same property you should offer him a drink and draw up paperwork. The value of our investments is inherent in their character. The prices at which we can buy and sell are at times wildly inconsistent, and completely detached from the underlying fundamentals. We will continue to function as your partner to take advantage of Mr. Market at every turn.
Prices are becoming significantly more reasonable. While it is futile to project a bottom in lunacy, I can tell you that we are able to find good, solid companies trading at less than 10 times earnings in a time when a 30-year treasury bond pays less than 1.3%. This is a compelling value on both relative and absolute terms. It is in moments like this that fortunes are made by the patient and diligent investor. We know it is painful to watch the prices of our securities drop, but when we have exercised the consistent discipline of maintaining adequate liquidity, we have a luxury that other investors can ill afford. We will encourage you to take advantage of the benefits of this discipline and reap the rewards over the coming decades.
Keep in mind that your investment team has wide experience. This is my third bear market, and they all feel terrible in the moment. In every case it felt like there was no bottom to irrationality and that the safe thing to do was go to cash and wait out the storm. In every case that would have been a disastrous decision. In every case the storm cleared, and the sun came out and good securities recovered in price and then continued to grow. We have no reason to believe that this time is different. Please never hesitate to call us with questions or concerns. We know that this exact moment is when you need us most, and we will be here to guide you through the storm to the calm of the beach.