Dear Fellow Investors,
We last wrote to you in a formal way while in the dark days of the pandemic on March 19th. The markets reached their bottom on March 23rd, and on that day, the Dow Jones Industrial Average (the “Dow”) closed at 18,591, a decline of – 35% from where it began 2020. Today, the Dow trades at 25,763 pairing the year loss to just -10% for 2020. Looking at the results from the lows of March, a 7172 point recovery or +39% off the bottom has occurred in just 12 weeks.
This “humanity” event has re-shaped our lives in so many ways over a short period of time. From work-from-home, viral concerts, zoom video meetings, shopping online, and empty malls, we have proven to be a highly adaptive species to life altering events. Fear, however, is a human emotion that rarely evolves. This we know.
In the prior letter, we asked you to stay calm, to trust the structural integrity of your diversified holdings, and to focus not on the immediate struggles, but on the longer term, as history shows that mankind eventually finds a way to conquer the threat to our livelihood. To quote Warren Buffett, we were encouraging you to “Never bet against America”.
Dealing with uncertainty in a crisis starts first with having a high degree of conviction of the caliber of the assets owned. Essentially, do you believe you own a quality asset or company that makes a desirable product at a competitive price? Better yet, do we own many of them, and across several segments of the economy? If you do, then the emotional response should be one of concern, but not panic.
When the crisis started in March, we wanted to reassure you that we had already rigorously tested each holding in your portfolio, and wanted to convey that confidence to you.
With confidence comes calm, with calm comes constructive behaviour and constructive behaviour is in finding the efficient balance between risk and rewards.
Next is to draw from experience. We have successfully guided clients through 5 major crisis events over 30 years and thus had a “playbook” to refer to. Our work is to study the past market, learn from it and support you in keeping a steady hand on the steering wheel (see attached chart of market returns following bear markets). In each case, a bear market is followed by a bull market. Armed with this, we knew what we had to do. Stay invested and/or buy more quality assets when on sale.
In history, the overwhelming odds shows that after a sharp unexpected 30%-40% decline, of the three possible responses, selling is the least beneficial one. The other two response are to Hold or Buy. Holding is the gold standard, and Buying polishes the gold. This is what we advocated. Coupled with the understanding that a “true investor” has a 3 to 5 year time horizon, this decision is supported.
Intuitively we all know its best to Buy Low, and Sell High. The problem is this is emotionally hard to do when it appears the “sky is falling”. We have found many investors simply don’t have the emotional fortitude for this, so we need to lend a “helping hand”. When the future appears bleakest, this is the moment when sellers panic and take the lowest price.
You don’t get distressed pricing when they are happy and content.
So What Now?
At this juncture with the economy reopening, there are many still many of the same uncertainties to occupy our thoughts. The virus is still with us so a plethora of questions remain.
- Will there be a 2nd wave?
- Will we retest the market lows?
- How long will this recession last?
- When will a vaccine arrive?
- Will life return to some form of normalcy even after a vaccine?
- Will the summer months slow the spread of the virus?
- How will high unemployment affect the recovery?
The list goes on and on ,and the fact of the matter is, nobody knows!
The virus is a science issue, and the best scientists are still learning about COVID-19, but are hopeful for a vaccine within the next 12 months. Promising work is underway at J&J, AstraZeneca, Moderna and Regeneron. J&J has a promising drug that has gone into Phase 2 clinical trials, placing them months head of schedule. However, we may still be 1 year or more away from a wide scale vaccine for world wide application.
However, this doesn’t mean we can’t march forward! We will forge ahead with what we can control and leave fighting the virus to the scientists.
Here is what we know:
- There is $3 trillion of stimulus money pumped into the US economy and $300 billion into Canada2. This is an unprecedented sum and provides substantial support for an economic revival in 2021 and 2022. Central banks are now actively buying corporate bonds, providing much needed liquidity to the credit markets so corporations can continue to borrow funds freely for their operations.
- With interest rates at historical lows and expected to remain so for a long time, we continue to find quality Corporate Bonds, Private Credit, and Agency Mortgages attractive for diversification and an above average 4%-5% yield. Depending on your risk profile, we have between 10%-40% allocation to fixed income assets. **We are content to continue collecting our 4%-5% interest here.
- We know that the “growth” stocks tied to the Information Technology and Health Care sectors have been immensely positive in keeping the world moving forward during this pandemic. The techs have enabled the work from home economy to flourish, while the health care stocks provided the hope for an medical solution. Both groups are likely to enjoy long term resilience with or without a 2nd wave. Active managers such as Dynamic iShares Active Global Dividend ETF (DXG), and TD Entertainment & Communications are heavily invested in technology and heath care stocks that have produced healthy returns in 2020. ** Steady but modest growth is expected to continue here.
- Until there is a vaccine, the infection rates will vacillate and markets will remain volatile as hotspots make the news. The COVID beaten down stocks of industrials, banks, real estate and travel related companies will have fast starts and false starts; but as the economy reopens there is opportunity here. Edgepoint, Invesco International and Cambridge are the “value” managers that are finding compelling values here. Patience will be rewarded. **There is an opportunity of above average return here over the next 12-24months.
So our playbook for going forward is it to keep our asset allocation inline within your objectives, continue to focus on quality assets, optimize income and strike a careful balance between growth and value managers.
In our March 19th email, we referred to the predicament facing wealthy investors with much of their life savings in a single stock and how they cope with gut wrenching declines like the -35% caused by COVID-19. They don’t sell! The example used was Phil Knight, founder of Nike. Nike stock had declined from $102/share on Jan 2nd to $65/share on March 20th. Today it trades at $97.1 It turned out people didn’t stop buying running shoes after all. Trust in your investments is how you cope and grow wealth.
In closing, we want to reiterate our confidence in all of the constituents of your portfolio, repeat our encouragement to stay calm, stay invested and channel your inner Phil Knight.
For changes made to your accounts during Q2, please refer to the appendix attached. We will continue to keep you fully abreast of the investing landscape as it changes.
Best regards,
Mike and Jill