Market Update – 3-18-20
The market continues its downward slide. Although it closed well off its lows today, the S&P 500 touched levels it had not seen since December of 2016.
Many of you are concerned about what you have lost. Frustrated by the deteriorating value of your portfolio in just a few weeks’ time. This is, of course, understandable. However, it is important for you to understand that you haven’t actually lost anything…yet. We are experiencing an incredible period of volatility, that, although was overdue, the magnitude of which nobody could have predicted. Fortunately, there is no gain or loss in a portfolio until its investments are sold. This is a fundamental principle that is often missed by the average investor. All gains or losses are on paper only until they are realized.
This principle is the reason we knew it was important to sell bonds and gold last week. Although we don’t expect to pick tops or bottoms in any investments, it was very clear to us that bond prices, which had increased at record rates, were at much higher levels than we could have dreamed and the only sure way to recognize those gains were to harvest them. Gold also sat at a similar place last week as the spot price ticked to 5-year highs. Despite the fear and panic in the stock market, both of these defensive asset classes have performed poorly since then simply because they had reached a price level that was excessive.
Stocks are now in the opposite position. Their valuations have become detached from reality, but on the downside. Let’s use a simple example: The Walt Disney Co. (DIS). Most of you know what DIS does. They are a media conglomerate that earns its revenue through diverse entertainment streams such as television, movies, radio, parks, and resorts. In this simple example, DIS traded at a high of $153.41 in the months leading up to the Coronavirus outbreak. The valuation at that level was a bit high, but certainly nothing excessive. Due to the impact of the Coronavirus, they have chosen to close all of their parks worldwide and even put a halt on most movie projects, due to the safety of the actors and crew. In addition, they will certainly feel the revenue impact at the theaters as people stay home. However, a mild offset to these losses will be an increase in their television business as well as their new on-demand streaming service, Disney+, the true growth opportunity for the company.
This afternoon, the stock of The Walt Disney Company traded at $79.07/share, a decline of just about 50% from its high’s. Even though the stock was initially slightly overvalued, there is no rational justification for a 50% cut in company value, with its strong balance sheet, pristine brand, and multiple streams of revenue, simply because they are experiencing, even in a worst case scenario, a period of 3-6 months of dramatically reduced revenue. Nobody is questioning the degree of revenue slowdown Disney will feel as we manage Coronavirus fears. Revenue will be cut drastically. However, this cut will be for a very finite period of time and when things return to normal, DIS will be back doing what they do best…separating parents from their cash. If we take a 3+ year time horizon on this investment, it will undoubtedly pay off handsomely. It is impossible to predict if $79.07 will be the bottom for Disney during this crisis, but regardless, it is a compelling value and anyone with time to let investments work through this uncertainty should be buying, not selling.
DIS is a microcosm of the entire stock market right now. The valuations have become disconnected to reality across the entire market landscape. Great value investors such as Warren Buffett and Bill Miller say that they have begun to get very aggressive in their buying. In fact, in the fall of 2008, about 6 months before the bottom for the market during the financial crises, Warren Buffet published an op-ed piece for the New York Times explaining that he was buying and why he thinks all individual investors should be buying. Most didn’t listen and the market fell another 9% over the ensuing 6 months. However, Buffet was ultimately proven right when the market spiked back in late ’09 and 2010. When asked by a reporter how he knew the bottom was near, his response was, “I didn’t. I don’t invest based on time; I invest based on value. Stocks were undervalued so I really didn’t care where or when they bottom, I just kept buying them at cheap prices.”
We are experiencing a similar time. Bill Miller stated this morning on CNBC that this is one of the five best times to invest in his 40-year career. “Coronavirus is scary, and I hope and pray that every American stay healthy and survives this horrible disease. But I am now buying regardless. The market has baked in a zombie apocalypse scenario that is leading to valuations that are absurd. We are currently taking advantage of that fear.”
Our job is to keep our people from making bad decisions based on fear. Selling into panic is a bad decision. It is the only way you will lose money. Now is a time to be buying, to be putting any additional money to work. This may sound like we are simply throwing good money after bad as the market decline continues, but I have no doubt that in 3+ years’ time, all of the new money that has been put to work will furnish outsized returns.
I do not know where the bottom will be and to paraphrase Warren Buffet, don’t plan to invest based on timing. We only invest based on valuation. Now is not the time to sell stocks, it is the time to buy them. If you have already put in additional cash, congratulations! Well done! If you still have money that you can invest for 3+ years, you will find this to be one of the few great opportunities of your lifetime, despite the fear, panic, and continued market selling. Focus on long-term investing and the rest will take care of itself.
In the meantime, stay safe and take the necessary precautions to ensure your health and the health of your family members. We will all get through this crisis together!
