FIRST QUARTER 2020 RETROSPECTIVE AND PROSPECTIVE

Didn’t See That One Coming!

“The stock market is a device to transfer money from the impatient to the patient.” – Warren Buffett

“Risk is not inherent in an investment; it is always relative to the price paid. Uncertainty is not the same as risk. Indeed, when great uncertainty- such as in the fall of 2008- drives security prices to especially low levels, they often become less risky investments.” – Seth Klarman

The first quarter of 2020 started off well but didn’t end that way. At the beginning of the year, we expressed concerns over the level of market valuations, rising global debt levels, international trade disputes and their effect on supply chains and business planning as well as other geopolitical tensions. Admittedly, we did not factor in a sudden GLOBAL PANDEMIC!

In Canada, the S&P/TSX Total Return Index very suddenly declined in the latter part of the quarter ending 20.9% lower than at the beginning of the year. The US market declined 19.6% in the quarter as measured by the US dollar denominated S&P 500 Total Return Index. The S&P 400 MidCap Total Return Index was down 29.7% while the Russell 2000 SmallCap Total return was even more depressed finishing down 30.6%. Markets represented by the MSCI EAFE Price Return index posted a 23.4% decline as measured in US dollars or a 17.1% slide when expressed in Canadian dollars. The Canadian dollar depreciated an astounding 9.8% to its US counterpart in Q1.

Black Swan: A black swan is an extremely rare event with severe consequences. It cannot be predicted beforehand, though many claim it should be predictable after the fact. A reliance on standard forecasting tools can both fail to predict and potentially increase vulnerability to black swans by propagating risk and offering false security. Black swan events can cause catastrophic damage to an economy, and because they cannot be predicted, can only be prepared for by building robust systems.
(Source: Investopedia)

In our opinion, a global pandemic is a Black Swan event.

From mid-February through March, events unfolded at a rapid pace. The longest bull market in history that was eleven years in duration was rapidly replaced by the fastest bear market. Global market indexes crashed as economies ground to extremely low levels. Globally, governments have scrambled to deal with the escalating catastrophe through limiting civil liberties, shuttering industries and restricting mobility. Unemployment levels have soared. Fear runs rampant as people become justifiably concerned about their health, ability to pay their mortgage/rent, purchase groceries, etc.

Governments have reacted with massive stimulus plans. Central banks have cut rates to enhance liquidity and keep financial systems operating. As of March 26, countries of the G20 (the largest 20 economies) said that they would inject over US$5 Trillion into the global economy and “do whatever it takes” to tackle the pandemic.

While tackling the pandemic is definitely job one, investors must turn their focus to the post pandemic world. Debts were high going into this crisis and they will be even more enormous when it is over. Economic activity will have to be restarted but the speed at which economic activity will come back is impossible to predict at this juncture.

Warren Buffett, one of the world’s greatest investors, advises that to survive a market crash, investors should:

Be aware that stocks can fall far and they can fall fast
Avoiding leverage will give greater clarity on events
Don’t try to time the market
Don’t view stocks as ticker symbols. They represent companies run by real people endeavouring to do their best
Stay invested
Go shopping (this is a good period in which to increase the quality of your investments)
Stay focused on the longer term
Be calm and be patient

Nassim Taleb wrote about events like we are currently experiencing in his book “The Black Swan”. In his subsequent book “Antifragile” he noted that robust systems can be severely impaired by black swan occurrences but they subsequently come back even stronger that they began.

Be assured that we are continuing to stick with our discipline. Now that the markets have retreated, we are less concerned with the previously high valuation levels and we are hunting for opportunities.

We believe that investment management is about managing risk, not chasing speculative returns. Like to learn more? Please contact us here>>

The opinions expressed here are ours alone. They are provided for information purposes only and are not tailored to the needs of any particular individual or company, are not an endorsement, recommendation, or sponsorship of any entity or security, and do not constitute investment advice. We strongly recommend that you seek advice from a qualified investment advisor before making any investment decision.