It’s difficult not to respect the “Sage of Omaha”- Warren Buffett’s wisdom and success in the markets. Buffet is a classic value investor and for nearly 10 years, value was nearly extinct.
“It’s always darkest before the dawn” is a good description of how the markets tend to rally after capitulation, the point where, essentially, anyone who is going to sell has sold. No one can ever time the bottom and it’s important to note that the market typically anticipates the news before the events. More often than not, the market performance is an exaggeration of the actual events and when the events occur, they are typically a non-event in the market.
What we are seeing now has begun to price in a Recession of sorts. I did write in my last blog the fact that in all likelihood, we would see a global “technical Recession.” The difference is that, particularly in the US, the economy and the financial markets are in great shape. We are not in the midst of a financial event such as what we experienced in the Great Recession or the Great Depression, we are in the midst of a health event that has and will impact financial markets.
We have seen market reaction like this before and we will see this again since the media coverage concerning the markets are both non-stop and often sensationalized. It’s difficult to maintain perspective when in the middle of crisis but it is that much more important to maintain perspective and focus on reality not fear. (Please reference the attached chart for historical perspective - "Epidemics and the Stock Market Performance")
Yes, certain industries have and will continue to suffer. Cruise lines, airlines, concert venues, etc. will “take it on the chin” as many refuse to travel or gather amidst the fear and possibility of becoming infected. Other industries have and will succeed, including convenience stores, supermarkets, online retailers, teleconferencing, streaming and gaming companies that are bound to be successful as people modify habits to more of a home environment.
There will be winners and losers. Diversification will allow an investor to weather the current financial storm. Also, considering the valuations of stocks now and the dividends that are available, it is beyond a buying opportunity. Investors should be “nibbling” at some of the bargains that we are seeing in quality stocks that are trading in the single digits of price to earnings ratios and with yields of greater than 4%.
For those that don’t have free cash to invest consider that your investments with us include a large percentage of your portfolio that is out of the stock market using cash, bonds, structured CD’s and for some, gold and options to hedge the risk to the stock market. Now is not the time to considerably change your allocation unless you just can’t take it anymore and are not able to sleep.
It should have been a priority to ensure that your allocation was mitigated by your tolerance for risk along with your desire for return. Your money placed in investments and investment allocation should be a customized embodiment of who you are, what you need and what you are willing to risk to get there. If not, wait until the market has reestablished itself, modify your allocation and continue to invest for the long-term since that is where the stock market shines. Market risk is a malady for the short term and a necessity for the long-term since the market is suited to offset the longer-term inflation risk.
Also, be practical, if the cost of living is greater than 2% and safe returns on bank, treasury or high-grade corporate bond investments are 1% or less, you are already “losing the game.” There are really no alternatives to successful long-term investing so better to face reality and understand the necessity of a diversified portfolio.
To quote Abraham Lincoln in recounting a historical story, “They presented him the words: ‘And this, too, shall pass away.’ How much it expresses! How chastening in the hour of pride! How consoling in the depths of affliction!”