Reporting from lock-down in my house in Chicago. Just thought I’d give an update on the state of things, our portfolio, and outlook for the next few months.
Last time I wrote toward the end of February, the S&P 500 was down 8%. Now, the coronavirus pandemic has almost completely shutdown the economy, taking the S&P down 33% from its all-time highs. Life has ground to a standstill in many cities with mandatory rules for people to stay home. Restaurants, bars, and other businesses are temporarily shuttering. Many small businesses are especially getting hit hard and thousands of employees are likely to lose their jobs. The idea is to isolate everyone long enough to slow down the spread of the virus or “flatten the curve” as they say. Hopefully it works and we can all get back to normal again.
It’s hard to believe how much difference a couple weeks can make. We were at all-time highs in the market, employment at full capacity, the economy running full-throttle, and for this to come out of nowhere just caught everyone off guard. 30% has been wiped off the stock market, trillions of wealth vanished into thin air, millions of lives affected. It’s amazing to see that despite all the technological prowess we have, that an invisible enemy can come and cause such disruption. It’s pretty humbling to see how fragile the whole state of things can be. Despite all this, I’m reassured that for the first time in history, the whole world is focused on one thing, one common enemy. The brightest minds in the world are all focused on controlling the spread of coronavirus and finding a cure for it. The virus doesn’t stand a chance. I’m confident we can get through this fairly quickly with many lives being saved and people getting back to work.
Regarding the stock market, it’s been the fastest percentage decline from its highs in history. Are we close to the lows? Possibly. Can we go lower? Possibly. For me, this is a chance to ignore all the emotion from the media, and focus on investing in companies that I’ve been wanting to own for years at attractive prices. The fund was lucky enough to have about 20% of its value in cash waiting for an opportunity like this. Although we are down so far in 2020, we’ve been excited to slowly deploy that cash into quality companies at attractive prices. Although the market can definitely go lower, we feel that several years out we’ll really do well on these investments. We don’t invest in companies unless we’re willing to hold for at least 2 years. Having a long-term time horizon for investing is the best edge you can have. It allows you to take advantage of temporary disruptions.
Although this certainly bears resemblance to 2008-2009 in terms of the market crash and volatility spike, we have to note that it was a financial crisis then and now it’s a biological crisis. In 2008-2009 the Federal Reserve was able to step in, provide liquidity, cut rates, and bail out a lot of banks that were in trouble. Sure enough the market bounced back rather quickly. In this case with the coronavirus, the Federal Reserve pulled out all the stops in cutting rates to zero, and buying billions in mortgage backed securities, yet the market still crashed even further. It looks like it’s going to take a lot more in this case. Luckily the federal government has been quick to respond in the form of a massive economic fiscal stimulus package. The government is providing aid to the states, ramping up production of ventilators, hospital beds, and face masks. They are also working with private companies that are willing to help. For example, Carnival Cruises is willing to provide their ships to provide bedding for sick people.
In addition, almost every American should be receiving a check of around $1000 which should inject cash into the economy for a boost. There’s also talk about providing cash to the airline industry, cruise industry, hotel industry, and others. (Whether taxpayer money should go to bailout struggling companies is arguable and a topic for another time.)
Hopefully by isolating and social distancing these next few weeks we can get the virus under control and American can start working again. We’ll probably see a couple quarters negative GDP growth and possibly millions of unemployment claims these next few weeks. However, I’m confident that by late summer 2020 things will mostly be back to normal. In the meantime, the stock market is on sale. For those with a 2-5 year time horizon, there are and will be amazing opportunities in the stock market. These are the times upon which real generational wealth can be created. We plan to act accordingly.
I’ll leave you with a favorite quote of mine from Charlie Munger:
“Our experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime.
A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables.
And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past.”
Robert Nowak is the founder of RTN Investments, LLC. RTN is a registered investment advisory managing separate accounts for clients and is modeled after Warren Buffett’s original partnerships. RTN’s goals are the preservation of client’s capital and to outperform the S&P 500 on a rolling 5 year basis by investing in undervalued stocks of high quality companies.