Beyond The Headlines

Dealing with Uncertainty

“Investing is dealing with imprecise assumptions tainted by an imperfect world haunted by uncertainty” – that’s how I described investing in my 2015 book – Outsmarting the Crowd: A Value Investor’s Guide to Starting, Building, and Keeping a Family Fortune.

Uncertainty is always a part of investing. We never know exactly what the future holds, but when it comes to specific quality businesses that we like to own, we can make the best educated guess about their future, and if we buy them at the right price, the odds are in our favor that they will turn out to be good investments in the long run.

Last few weeks, and likely the coming months, will probably be one of the most uncertain times in our investment careers. It is important to understand well the nature of this uncertainty though. There are at least three sources of uncertainty we are facing: the impact on public health, the impact on the economy, and the impact on the stock market.

Of course, at very top of our concerns is a very real public health risk associated with the spread of the new virus. We hope that all the right steps will be taken to slow down the spread, and offer care to those in need. We understand that the very least we can all immediately do to help as individuals is stay home, work remotely if possible, and otherwise avoid crowds. Needless to say, if anyone who is not feeling well should stay home as well.

The impact on the economy is a big open question mark. We see it in two dimensions though. How deep of a cut in the economic output we may expect, and equally important, how long it will last. We will continue to have a better understanding of both dimensions as time passes. The bright light at the end of the tunnel for us is the recovery that will follow though. What encourages us the most is the pent-up demand that will be unleashed once it’s safe again to not only go back to our normal routines, but maybe even treat ourselves for the time spent in four walls with Netflix and some hastily chosen snacks. Let’s think for a minute of all those small and big pleasures we are saying no to these days — from lovely dinners with friends to trips to sunny Italy!

The impact on the stock market is much more visible and immediate than the impact on the economy. Stocks trade five days a week, and every second of the trading day all participants try to do the impossible — guess the short-term impact of the virus on the economy, and corporate earnings.

As investors, we see ourselves as business owners. When we buy a business, we want to hold it ideally forever, but at least for 3-5 years. As you know well from our earlier articles, when we buy a business, we buy its stream of profits from now until the end of its existence. One quarter, one year even have a limited impact on the long-term earning power of a business. That quarter though, especially a weak quarter has a big impact on the stock price. That’s where short-sighted investors panic, and sell a stock, while long-term investors come in and buy the stock to hold it for the long run.

As dramatic as the daily stock market moves can be, we never see volatility as risk, but as an opportunity for a patient disciplined investor. The risk to us is a possibility of a permanent loss of capital. In times like this, the shareholders of the more vulnerable companies with weaker businesses models, and higher leverage can experience a permanent loss of capital or close to it. That’s a loss that can’t be recovered. The stock price drop in a strong quality business is just a passing paper loss though.

In any market sell-off or times of economic weakness certain industries may be affected more than others. This time around anything related to travel has taken the biggest, and the most immediate hit. Airlines, cruise lines, hotels, restaurants have all experienced a big, and sudden drop in demand, thus a drop in revenues, and given their high fixed costs, likely big losses. Some of them might be in a position to weather the storm, others might not be so lucky. We don’t own any stocks in those industries. We made a frequent point in our previous articles that what we don’t own matters as much as what we do own.

After few weeks of record market swings, the obvious question arises – when does it end? Where is the bottom of the market? Now, if you followed our articles over the last few years, you know that we couldn’t time the top of the market. Today, we won’t be able to time the bottom of it either, we will do what’s possible though, which is gradually buy, the same way we were gradually selling. We are slow when we want to be, and we can act fast, and be decisive when we need to be. We plan on building positions in existing holdings, and expand our portfolio with new picks from our long wish list.

Over the last few years, we grew increasingly uncomfortable with the stock valuations, and the excessively high level of the stock market. For that reason, we grew our cash position, we also added what we call – market protection in the form of a gold holding, and a few exchange traded funds that go up when volatility and risk aversion spike. That gave us a softer landing in this dramatic sell-off, and has already given us dry powder to deploy. Again, we are acting very slowly.

We are long-term patient disciplined investors, and we manage family fortunes over generations. The last few weeks, we have heard from many of our clients who appreciate the steps we took at the top of the bull market, and the steps we are taking now. We even have a new client join us in the midst of these uncertain times, and we are grateful for this vote of confidence.

We know that many of us have seen empty shelves in our local stores, many of us stocked up on canned food, cancelled trips, changed plans, and severely curtailed our daily and weekly routines. Let’s not forget though that it’s not forever, it’s just for now, the same way, the economic weakness, the stock market sell-off are not forever, just for now. The U.S. economy is big, strong, diverse, and the vast majority of the U.S. businesses are here to stay, and they will prosper for generations to come. In the midst of this storm, we may have a rare chance to buy many more of them at enviable prices, and we will do so. Again, very slowly.

We hope you and your families are staying safe, and taking necessary precautions. We are always here; we are always reachable if you need us.

Bogumil Baranowski

Published:  3/16/2020

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 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.