Hi everyone. Cilla McKinley here. Sometimes, when things are sailing along smoothly, you may go months without hearing from our office. So, when you hear from us twice in one week, you know that we’re going through a rocky spell.
While the market conditions we’re experiencing may seem intimidating, this isn’t completely unexpected. We’ve been gently warning of a possible economic slowdown and market pullback for some time now. The coronavirus has just been the catalyst that kicked off this particular correction.
We continue to see uncertainty and fear in the stock markets around the world, and investors continue to bombarded with what feels like more and more bad news related to the coronavirus. Sticking to our investment discipline throughout this time period will separate average investors from great investors. So, let’s wash our hands, stay calm and consider what happens after the coronavirus scare has passed.
According to current data, there are approximately 7.58 billion people on planet Earth, and we have never been more connected than we are now. Being this connected is a double-edged sword however. The downside can be the risk of the spread of disease because of the ability to move from one region of the world to another within a few hours, but an advantage, is the availability of some rare investment opportunities.
How lucky we are to live in a time where medical interventions exist that help reduce mortality in a pandemic situation, not to mention that we are instantly connected with real time information about the numbers of those impacted by this virus. This has allowed governments to respond swiftly and effectively to limit continued spread of Covid-19. Currently the amount of new cases coming from China is down to single digits. The Chinese President, Xi Jingping just visited Wuhan, the point of origin for this virus. Factories there have begun to reopen and are starting production again, even if at reduced rates for the time being.
As I previously mentioned, this correction we’re experiencing is something that we’ve been expecting; the U.S. economy was at the tail end of record setting 11-year bull market. The international markets were also beginning to show signs of slowing down and there is political uncertainty surrounding the US presidential election later this year. At BF&A, we understand that markets move in cycles. We typically experience extended periods of growth, in exchange for painful but often short-lived downturns. We’re living through another pull back and as long-term investors, this won’t be the last. The human brain is programmed to be hugely motivated by fear, a trait that the media skillfully exploits. Good investors are counterintuitive, quieting this trait that can inspire us to panic into selling at the worst possible times. I think this counterintuitive approach was best expressed by Warren Buffett when he said, “Widespread fear is your friend as an investor because it serves up bargain purchases.”
Market environments like this highlight why we only work with active money managers. We’re not interested in owning an index because the entire goal of investing should be to invest in a company before it has done well enough to get added to an index, and to get out of a company before it has done poorly enough to get removed. When the indexes are dropping because of short-term fear, our managers are picking up bargains on companies that can adapt and take advantage of what is happening in the economy. For every company that might fail because of this slow down there are others that will thrive. One example is a company called Illumina, a genetic testing company. They are industry leaders for mapping out an individual’s entire DNA sequence. The reason this is so groundbreaking is because it would allow medical professionals to eventually customize medication to each specific individual, making therapies both more effective and reducing complications. They have lowered the costs of this type of testing from over a million dollars per test to just $1,000, and expect to continue to reduce costs.
Our office has been preparing for an eventual economic slowdown in several ways. We always recommend that clients keep cash on the sidelines to make sure you have enough liquidity in the event of an emergency, or for buying opportunities. Our portfolios are invested across many different asset classes and sectors. Some will be impacted by this slowdown and others will be resilient. Utility companies are an excellent example. No matter what, people will always need electricity, water and of course internet access so they can remain connected to the outside world. Also, our managers are looking for companies that have been strong enough to consistently pay dividends. Dividend paying companies have enough available cash to be able to withstand extended periods of an economic slowdown. Lastly, we make sure that our clients also have exposure to bonds. These investments always seem boring and will underperform when markets are going up but their purpose in our portfolios is to add stability in turbulent markets, and our bond components have held up well in the current selloff. Bonds are kind of like the airbags in your car--you seldom think about them, but should you get into an accident, you are grateful that they are part of your vehicle.
We are here to answer your questions or to provide a little reassurance should you need it, so don’t hesitate to reach out to us with your concerns. We will stay in touch in the days ahead. Thanks for listening.