Volume 91 No. 4 - April 2020
Let’s speak plainly. We face twin threats. From one side, we’re confronted with the reality of a virus and a spreading global pandemic. From the other, we face the havoc that prudent government-imposed shutdowns of national economies are wreaking on our markets and financial realities. The plain truth is: with all these moving parts, we, as a society, don’t have a firm sense of where we are today or where we will be in the near future. With daily press briefings and the growing numbers of shelter-in-place orders, we live in unprecedented times.
Uncertainty breeds the anxiety that lays the groundwork for bad decisions—at any level. Amid this emerging uncertainty about balancing economic concerns with controlling the spread of COVID-19, heads that remain calm will be the ones who make the best decisions. If we can remain calm, we can look at our times rationally and discern certain truths.
Panic = Irrationality
Did you know that the United States has over 100 toilet paper manufacturers and that a nine-roll package of toilet paper should last the average family of four about a month? Despite this, last week’s news showed scenes from all over the country where Americans carted away a six-month supply or more of toilet paper on one shopping trip, leaving others without. Why? While there’s no evidence to support that COVID-19 has caused widespread issues with digestion, there’s much more evidence to support that when people feel as though control has been wrenched from them, they grasp at control wherever they can—even if that’s something as nonsensical as hoarding toilet paper.
In the US today, investors feel as if they have lost control. The market is panicking. A sense of control feels out of reach for many; so, they hoard supplies they can touch—something tangible.
Are There Opportunities to Buy Into This Market?
Yes, during the last bull market, since 2010 or so, the majority of all money entering the stock market entered through index funds. Index funds are relatively easy to choose, require little research, and act based on automated decisions and formulas, not analysis and strategy. The problem with this investment strategy is that it rewards and penalizes all companies in the index fund equally, regardless of their individual results, strategy, or operations. In a bull market, all securities in an index fund rise, whether they represent strong or weak companies. In our times right now, all securities in an index fund are pulled down, even if their operations and strategy show the promise to weather the storm better than their index fund counterparts.
During all prior bear markets, those who prospered were the investors who acted rationally and recognized opportunity. Despite inevitable periods of uncertainty, stocks have rewarded patient, long-term investors, and this belief forms the core of Investment Counsel’s investment discipline.
While recognizing the seriousness of the current situation, we can see the beginnings of rays of hope emerging in this crisis. The US has ramped up testing. Research is underway to find a vaccine. Overseas, some countries are turning the corner. However, now is the time to watch those flashing amber lights. Uncertainty still reigns.
Late last year and entering 2020, Investment Counsel cautioned about potential uncertainty in the markets, and we analyzed our positions and our approved stock list. We pared down our equity holdings to increase our cash and to focus on companies that could weather an economic slowdown or storm. Since early this year, our approved stock list includes companies with:
Strong balance sheets
The continued ability to pay dividends
The ability to weather a slowdown
No one could have predicted how the twin threats brought on by the coronavirus/COVID-19 crisis would impact the United States and its markets, but our analysis means that Investment Counsel now has higher cash balances that will help us weather the storm and position us to re-enter the market when the time is right. When the threat has passed or our nation has found the right balance between health and economic risks, the opportunity to enter the market will come back.
When that happens, we believe that the stocks on our approved stock list are the ones to target. While we believe that the current sell-off has unfairly pushed the prices of some equities lower than reason would support, we advise a wait-and-see approach until we have more clarity around the coronavirus and its resolution. When the opportunity to enter the market comes back, we will be ready.
The Importance of Perspective
The unknown scares us—perhaps more than reality. While the media focuses on how bad our times could get, assuming some doomsday scenarios, it’s important to note that, as of this writing, the coronavirus and the COVID-19 illness seem poised to follow the same bell curve as past virus-related health scares. As we look around the world, we can see progress as other economies begin to emerge from the paralysis that this novel coronavirus has caused.
While politicians and policymakers grapple with how best to address and balance the economic and health risks presented by this crisis, we can take some comfort in that new infections have begun to level off in some countries, vaccines are being researched for development, and people generally are doing their part in slowing the spread of the disease as our health systems prepare to help those in need. The crisis will end. The twin threats that COVID-19 presents to our physical and economic health will be addressed. We will move on.
Investor Peter Lynch once said, “far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.” Now is the time to hold tight and weather the storm. Investment Counsel has a plan to get through this crisis. We’re in this together. As always, if you need to reach us with any questions about your holdings or our perspective on current events, please reach out. We’re here with you.
Investment Counsel Inc. is a registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.