Beyond The Headlines

Power out, lights out!

May 8, 2020 | Bogumil Baranowski
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Whenever I speak about investing to audiences across the country and around the globe, there is a question that almost always comes up.  For years now, I’ve been asked about the 2008/2009 financial crisis. Someone in the audience usually wants to know what I was thinking at the time and how investing felt in those days. In the coming years, if anyone asks me how March 2020 felt, I have my answer ready– power out, lights out!

As you may know from my earlier emails, Megan and I have temporarily traded our city comforts for cabin life. We have running water up here in the woods, but it’s not drinkable. Instead, we carry 5-gallon water jugs uphill every week or two. These are the same kind of jugs we are used to carrying around marinas provisioning sailboats for trips among tiny islands in the Caribbean. Our internet connection is surprisingly strong – maybe even stronger than the one in our apartment. I suspect our neighbors’ video conferencing and Netflix-bingeing might have had something to do with that! Internet, and water aside, the other essential that we don’t think twice about back in the city – is power!

Only last week, with stronger spring winds, and heavy rains, we had the joy of experiencing a sudden power outage. From a moment to a moment, our life went from busy work with phones charging, laptops on, our old fridge humming – all of which we took for granted — to the complete darkness and silence of the woods. It was a very disorienting feeling for us, city folk, and that’s exactly how March felt to many investors. Darkness and silence, power out, lights out. Impossible to tell which way to go, and what might be right ahead of us.

We at Sicart didn’t know how long the correction would last or how far the stock market would drop. But we did know just what we wanted to buy if prices got interesting. We took advantage of the sharp declines, and started a collection of new investments that we plan to hold for the next 5-10 years and beyond. These are businesses we know well and have been following for years, but we weren’t comfortable with their prices until March. As a matter of fact, I was able to see managements of a few of our new holdings as recently as late February.

The market drop wiped out three years of growth in three weeks. Then the sudden correction was followed by an equally dramatic rally, bringing substantial rapid gains in many of our new holdings. As you know from our earlier articles, we tend to buy stocks only when the price is right.  That doesn’t happen often, so although our trading activity is usually very infrequent, it is decisive. During March and at least half of April, we were active almost every week, nibbling on stocks we like.

At the same time, we had a few “sell” candidates. Some were businesses we had held for a few years which were trading at multi-year or all-time highs. They had already done well, and given the nature of products they sell – canned goods or household necessities — they received an extra boost from investors searching for safety in the midst of turbulent markets.

Other “sell” possibilities were holdings that we refer to as “market protection,” mostly exchange-traded funds that rise in value when volatility or risk aversion spikes. The only market protection holding that we increased in March was our gold holding. We took advantage of the price drop as many investors sought liquidity. With gold prices rising in response to the Federal Reserve’s money printing, this turned out to be a well-timed decision. Gold may remain a long-term holding as an alternative to cash — dry powder ready for future use.

Lights go out, lights come back. As of early May, with US stock market indices having recovered a good portion of March losses, it may seem that the trouble is behind us. But we are not so certain. We are not public-health experts, but from what we are learning, the pandemic may continue for months if not longer. There is also a looming risk of a second wave in the fall, bringing the dangers of premature reopening.

When I have questions about the future, I hardly ever look for answers in the daily news. Rather, I turn to history. Recently Megan lost me for countless evenings to a dense but fascinating read – The Great Influenza: The Story of the Deadliest Pandemic in History by John M. Barry.  It’s over 500 pages long, covering everything you could possibly want to know about the 1918 pandemic, also known as the Spanish Flu. I still believe that Mark Twain was right in saying, “History doesn’t repeat itself but it often rhymes.”

Apart from reading dense history books, we at Sicart spent the last few weeks listening to earnings calls of many publicly traded companies. We were curious not only about how our holdings were faring in these difficult times, but also about how the most vulnerable business sectors are weathering the storm. Those calls reminded us that the first quarter included only one month of lockdowns; the second quarter may look more difficult. We are encouraged, though, by the prompt strategic decisions made by many companies to adapt to the current environment, and position well for the future.

At the same time, we are well aware that a long journey lies ahead of us. Health risks may linger well into the next year.  In response, lockdowns may come and go for some time. If that’s the case, the economic impact will continue, and corporate earnings will reflect it.

For now, the stock market is trying its best to look far beyond the near-term challenges. Some may say it’s too optimistic. Our stock buying wish list remains long, but we have slowed our purchases as prices rose. We plan to remain cautious, acting only when the time is right. Although March and April might have felt like a decade, they were not. The volatile markets may provide us with more windows of opportunity in the coming months.

We cannot predict whether it is the entire market that will drop, retesting March lows, or pockets of the stock market will experience headwinds one at a time. We remain ready to take advantage of either situation. What we do know is that the size, the strength, and the depth of the US economy will ultimately prosper for decades to come, because within that economy there are many wonderful businesses worth owning. We are happy with our market protection holdings, our cash holdings, and a good selection of stocks that we started to replenish in March. We are comfortable holding cash in the short run, but as you know, in the long run, we’d rather own quality businesses with growth potential and pricing power.

Back in the cabin, our first power outage was followed by another one, when one more tree fell nearby. We had learned from experience, and now we keep our flashlights always at hand. And though we might feel we are out of the woods in the stock market, we can’t be certain. There may be more dips, possibly even another bottom for this market before we can say that it’s all behind us. But we’ll be ready: we know what we want to own, and we won’t hesitate to buy it.

As one of our newer clients reminded us recently, turbulent markets could be the best of times to start thinking about your nest egg, your family fortune, and position it well for years to come. We are always here when you need us.

We are hoping you are staying safe and well, and making the best of these peculiar times.

 

Bogumil Baranowski

Published:  5/8/2020

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a clientspecific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.