Beyond The Headlines
Rethink, Reset, Restart
One way or another, we have all paused in the last few weeks. It’s been over a month since Megan and I were sitting on packed suitcases ready to fly first to Paris, and then to Warsaw. Our return flight would have been just a day before the ban on flights from Europe was imposed. Looking back, we are glad we decided to forego our trip. Since then though, with the first day of spring already behind us, we have all had a chance to rethink, and reset as we wait to restart our daily routines.
On the investment side, our approach and our philosophy haven’t changed one bit. We manage family fortunes over generations. We are disciplined, patient investors, and we see ourselves as business owners. Even if the stock market were only open once a month instead of every business day, even if benchmarks and indices didn’t exist, even if the news stopped reporting on the market’s ups and downs, we would invest exactly as we have for decades. We buy quality businesses for their streams of profits, and we want to pay the lowest price possible for them.
With the major indices currently down 25%-30%, and the median U.S. stock price reduced by almost 50%, the current pricing of many businesses looks a lot more compelling. Yet while we have started to “nibble” on many stocks we like, we remain cautious. We still hold ample dry powder to deploy (cash, market protection, and certain holdings we could liquidate to raise cash; for details please refer to our earlier posts). After a closer look, we see that the weakest companies have indeed fallen a lot in the last few weeks, but the highest quality stocks (with some exceptions) have yet to give up large percentages of their bull market gains. If history is any guide, all bull markets come to an end eventually. However, they often bottom out gradually, as investors try to still hold on to their stocks. I’ve heard this phenomenon compared to a cozy bull market turning into an uncomfortable bull ride as volatility spikes.
It’s a good reminder that at the end of each day, every single share of every single company traded on the stock exchange has an owner. There are no shares that nobody wanted that were somehow left behind. This was true even on the worst of recent days, March 16, 2020, when the U.S. stock market dropped 13%. It was the second-largest daily drop since 1987, yet at the closing bell, all shares had an owner, too.
So, who are these new owners, in bear markets? Legendary banker J.P. Morgan is believed to have said that: “In bear markets, stocks return to their rightful owners.”
Then what do these “rightful owners” look for? There are at least three qualities to evaluate in a potential stock investment: profit, growth, and the balance sheet.
When the market is rising, everyone forgets the profit and the balance sheet; what seems to matter most is growth at all cost. WeWork (co-working spaces) was a prime example of the growth frenzy of the last bull market. Long before the pandemic kept us at home and froze much normal economic activity, public markets started to wise up and resoundingly rejected the WeWork initial public offering. It was a swift transformation from a $50 billion valuation to a near bankruptcy.
In times of distress, balance sheets come to the fore. How does a business finance its operations? How much has it borrowed, how much does it owe, when does it have to pay, how much can it self-fund its operations from its profits? These are the questions on everybody’s minds today as we watch convulsions in the credit markets. Until recently, all assets seemed risk-free. Investors chased an incremental percentage point of yield, conveniently overlooking whether or not the company would be able to pay back its loans. That’s changing now, as investors rethink their investment choices, resetting their expectations and risk preferences. It’s helpful to remember that a 30%+ drop in the market will take a 50% rally to recover to a starting point. A 50% drop will take a 100% rally to recover. The importance of not losing money has come to the forefront of everyone’s attention.
Beyond market’s constant mood swings from optimism to pessimism, though, what we believe truly counts in the long run is a company’s profits. Do we own a business with lasting, growing profits (otherwise called cash flows)? And finally, what do we need to pay for each dollar of annual profits? As value buyers, the less we have to pay, the happier we are.
To make good investment choices, we think in terms of the next 3-5-10 years, trying to see where the businesses we buy could be in the following years, as pent-up demand is unleashed and our former lives restart.
Our daily routines have changed for now. In the first days of our self-imposed lockdown, Megan asked me how I would send my shirts to the dry cleaners. I told her that I wouldn’t be needing fresh shirts every day for a while. I haven’t actually worn a suit in over a month, which might be a record in my adult life.
As you might remember from my earlier articles, I find daily news, and minute-to-minute updates highly distracting. In the first days of the self-imposed lockdown, we spent way too much time trying to track each new development. Since then I’ve returned to re-reading annual reports, refreshing my memory about so many good businesses on our wish list.
Since I’m saving somewhere between five to ten hours a week on my commute, I’ve found another replacement for the daily news. I signed up for online courses with Udemy, which I highly recommend. I’ll share more in the coming weeks, but if you need a healthy distraction for your mind in these peculiar times, taking an online course could be an idea worth entertaining!
All the same, we at Sicart have had full days in these last four weeks. Between calls with clients, research, and trading, days seem to fly by. I have also been writing, and preparing some items on weekends to have a head start before each new week. For us as stock pickers, it’s been a fruitful and exciting time.
While we remain uncertain about the near future, and long to know when we’ll be able to resume our social activities that we once took for granted, let’s not forget what remains certain. However long the pause, we believe that the businesses we own will continue to sell goods and provide services everyone wants, and our investments will once again, we believe, deliver respectable returns, pulling our portfolios forward.
Maybe this crisis will bring a silver lining, too. In many ways it has brought us closer, made us more compassionate, allowed us to slow down. Meanwhile we’ve been relying on technology to keep us connected, keep us working, and keep us entertained. Until it’s over, let’s stay home if we can, let’s avoid crowds, and let’s make this a time to rethink, reset, and restart.
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 client‐specific 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.