March Update, 2020: The Fox, The Chickens, And The Hen House

When I was 25 years old, I had a bit less than two years of experience as a professional investor. On October 19, 1987, I received one of the most important lessons of my life: the stock market owes you nothing. And, if you demand it to give you a price on any given day for what you own, it could be zero. It had never occurred to me that the most profitable company in the world at the time (IBM), with revenues of $51 billion and valued at more than $200 billion the day before the crash, could have no price. No price that anyone was willing to pay to buy the company on the largest, most respected stock exchange in the world. For a period of time that day, the collective wisdom of investors (if they were paying attention) was that the company was worthless. Really, I saw it with my own eyes. It was wild! 

IBM had no buyers at any price and the stock market was down 22.6% that day. I was stunned. I called my father. He had taught me investing when I was young. He hadn’t mentioned this type of experience! I figured maybe he could give me some advice. He said, “The market is just that: a place where fools and the wise are all welcome. Just because the fools say something doesn’t mean the wise have to agree.” But, he said, “Sometimes even the wise are afraid for a time at what the fools say. Eventually, the fools have nothing left to sell and the wise have done one of two things: nothing or bought stocks”. I thanked him and immediately started calling my clients. 

When there is panic and people look at the stock market, it’s usually safe to assume there are good deals to be had. Whenever valuations are up and down 4% a day it’s safe to say no one who is buying and selling knows what’s going on. The fox is in the hen house. To keep the metaphor running—it’s better to be the fox. That also implies that selling during a panic, historically speaking, is a bad idea and eating chickens is a good idea. It’s been a while since we’ve had a good panic and perhaps, we are soon to see the days of fire sale prices again. We really don’t know if a crash is coming, but when 80% of the money pulsing through the markets on a daily basis doesn’t care what they own, doesn’t know—much less care—whatever ‘it’ does, couldn’t care less what ‘it’ earns, nor at what price the company is valued… anything is possible. Read the first 2 paragraphs again. 

The Dow Jones was at 1700 at the end of the day on October 19, 1987, having just fallen the most in history for a day, a record percentage drop still unbeaten to this day—22.6%. In the subsequent days the calls for the next great depression were numerous. It didn’t happen. People were blamed, government studies and academic papers were written. Markets ultimately quickly recovered. Subsequently, the market ‘crashed’ again in 1989, 1990, 1997, 2000, 2001, 2002, 2007, 2008, 2010, 2011, 2015, 2018 and probably/maybe kind of feels like… 2020. Yet, in all cases, those that used the stock market as a ‘store’ to buy companies when things went on sale did well. 

Today, we have a situation that will likely cause most companies to experience some business interruption. This disruption will likely cause profits to decline. Some companies will be more affected than others. No one knows the duration of the drag, but it will be easily manageable to navigate for great businesses and likely pass in severity as the year ages. But here is where it gets interesting… investors will start saying all kinds of things, some will go on TV and say things like the world is coming to an end. Historical similarities will be quoted. Virologists will make projections. Some investors will panic as the news likely (as we expect) becomes worse. The headlines will become more terrifying. Stocks may fall more as people become consumed by the fear of falling prices. Valuations of excellent companies will become very attractive. The foxes will feast. 

To be a fox, you need to eat quickly because the chickens will soon be devoured as there will be more foxes to the feast. So, the issue to be considered is when to eat, when to leave the chaos of the coup and enjoy the spring days. As we said in our most recent call we raised cash prior to the panic. We are ready and excited at the prospect to invest. As with all panics, they pass and the companies that have strong business models will flourish again. The dividends on many companies are 3X what are available in ‘safe investments’ like bonds. While these companies’ valuations may fluctuate tremendously in the days ahead their long-term values are growing. 

At times like these, we wish you to know that we are actively looking to invest your cash resources into wonderful companies. We will always keep cash to meet your immediate needs. 

The Dow Jones fell to 1700 in 1987 and in spite of numerous crashes subsequent to that day, today the Dow closed at 25,865. Warren Buffet was recently asked what he would do in light of the current turmoil. He effectively said that he’s not concerned with today but rather with what he can buy when things go on sale. Like Warren, we are cashed up and eager for the fox to flush the chickens. Warren Buffet is 89 years old, but he still thinks like a fox and you should too. 

Please feel free to contact the office should you like to discuss the present situation and to review your portfolio. We have reviewed every portfolio recently and we feel confident in the future, but we also want you to feel and act like a fox and to do that we know that you may want to talk. We are all ears.