It's Time For A Pushback

As we are now in a government mandated lockdown in the entire state of California, and New York as well, it is time for cooler heads to prevail, if they exist, amongst public policymakers.  We are not health experts, as we have said, but we are a professional research organization in that we make a living researching ideas of all sorts, and making determinations as to whether or not we want to invest our and our clients' hard-earned money in those ideas.

From what we have observed from research on the coronavirus, while it is serious for a small subset of the population, the statistics appear to show that the vast majority of people infected by the virus are not at risk of death.  Yet, the entire economy is being sacrificed at the altar of "public health" with no understanding that the economic damage that we are facing will cost real lives, potentially far in excess of any death rate that can come from this virus.  This is an important point to understand, yet  many don't. It is a fact that when percentage points are taken off of GDP,  it costs lives.

It has been seen throughout history that the most vulnerable and poor are the ones that suffer the most when lower standards of living exist.  There is a direct link to standards of living and economic growth.  And at the lowest socio-economic levels  (ie. where standards of living are already low) allowing those standards to drop further will result in death.  In first world nations, like the U.S., it may not be as obvious, at least initially, but in second and third world nations, it can become obvious quickly.  Just look at what lack of economic growth has done in places like Haiti, Africa, etc.  

Granted, there are external reasons why this has happened in those places, but it ultimately comes down to the reality that a lack of economic growth is the primary culprit, regardless of how it has come to pass.  Is this really the path we want to take?

Many have tried to "guess" at what the economic impact will be in the United States.  We have seen estimates for Q2 GDP being down anywhere from 10-50%!  This is a massive contraction, and it is hard to believe that there will not be some unable to survive, literally, such a drastic cut in economic activity.

We have quietly and to ourselves been saying we thought the cure was going to be worse than the disease with this coronavirus situation; now we are convinced.  It's time to end this insanity!

Now that we have gotten that off our chests, what to do?  We have been hard at work speaking to the managements of our companies and making a determination as to the fallout to our portfolio (of course notwithstanding the obvious decline in values).  Thus far, we have determined that with very few exceptions, our companies will come out of this okay.  There will definitely be a hit to most businesses revenues (and, thus, earnings).  However, the narrative-based investment approach works and we can say that these narratives are either going to survive or, in some cases, oddly benefit from the circumstances this situation has created.  Now, more than ever, the concept of "owning businesses through multiple market and economic cycles" is being tested.  But we believe it will, once again, be proven to be a successful approach, especially in difficult times.

The crazy volatility in the prices of our companies at any given second on the exchanges is not something to which we will react.  We have never seen the most proficient of traders consistently be able to outguess such markets in the short run and we are not about to change our mode of operating at all.  That said, where appropriate, there may be opportunities to add to positions or take new positions in the present environment.  We are diligently looking at those opportunities even as we publish this update.  Thus, there could be small changes but we emphasize they will likely be small.  

So far, our analysis has confirmed our long term, narrative-based process.  We liked our companies before this debacle, and we like them more now!  Stay strong, and stay invested!!

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

As for Volatility -- There's More Problems than the Coronavirus!

image: YouTube (link).

If anyone really enjoys the kind of wild swings in individual stocks that make no fundamental sense (and, for that matter, swings in the major stock market averages) and that have been an increasing hallmark of the market for the past couple of decades and not just in the recent sell off, then they should just keep proliferating the "derivative" phenomenon of passive vehicles like ETFs and the algorithmic trading (algos) that are creating and profiting from such activity.

All of those who say "I just use index funds" have no idea what they are investing in from a business standpoint.   They are essentially allowing black-box models to deploy their investment dollars which are at the center of the problem with the market mechanism and these investors are actually contributing to the crazy volatility we are seeing, and have been seeing for some time now.

It was one thing when so-called "indexing" was a tiny fraction of the market, but now that almost 35% of invested funds are indexed, it's an entirely different situation. By the assessment of the many "human" traders we work with (yeah, there are still a few left), a whopping two-thirds of trading activity is now being done by algos/passive.

Couple that massive increase with the regulations spanning the past twenty years that essentially made it unprofitable for brokerage firms to make markets in OTC stocks (those are the small/mid-sized companies), and you have an illiquid market, subject to the whims of the computers.

Of course, as active managers, we will be accused of bias for pointing this problem out: that's fine by us. After 35 years of watching our industry abdicate responsibility for making real investment decisions and come up with "products" that have nothing to do with financing real businesses, frankly, we have no problem saying what we see going on!

We've spent our careers watching the biggest of the Wall Street firms get bigger and fewer in number every step of the way.  These same firms have been pushing more and more financial "product" that has nothing to do with raising capital for businesses or providing quality research to real investors.  BlackRock now "manages" almost $7 Trillion in assets (or they did, until about three weeks ago!).  

How do you manage $7 Trillion in assets?  The answer is: you don't!  You create as many vehicles as you can that keep the "fee train" going: vehicles such as ETFs and index funds, because when you have that much money to manage, you have to own every stock in the world, as the CEO of BlackRock admitted in an interview five years ago that we blogged about (see THIS POST from 2015).

Those big Wall Street firms also emphasize "financial planning" instead of actual "asset management" that would involve analyzing specific stocks (no offense to financial planners, but they are trained for different skills than stock selection and analysis). Those big Wall Street firms also tell their advisors: "you don't want to be managing money, you just find it" -- again, de-emphasizing the responsibility of making real investment decisions about individual businesses, which is at the very core of the problem.  This disengagement from business analysis is a big part of how we got here.  We will be circulating more of this in coming days/week.  If the "smartest guys in the room" don't agree with us, so be that too!

This is why we have spent our professional lives promoting the need to take a business approach to investing!  No doubt, there is enough uncertainty in the real business world right now for us to sort out.  Fortunately, because we take that approach, we are in touch with the managers of the businesses we invest in as they assess the impact the COVID-19 debacle will have on their business. Most definitely it is not completely clear for a number of businesses. But we take great comfort in knowing that one of the most important, if not the most important, aspects of our due diligence process is an assessment of management capability.  And in times like these, this provides us the confidence necessary to advise incremental additions to portfolios for those who are able, and to absolutely stay the course for all.

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

Don't get off the train, 2020 edition

On Monday, March the 2nd, 2009 we wrote a blog post entitled "Don't get off the train" advising readers of this blog not to panic and liquidate long-term investments during the severe bear market that was then underway.

The title of that post was a reference to the fact that the market can move very rapidly and with a lot of violence, and that trying to jump on (or off) with any kind of delicate timing is extremely dangerous. The post was written at the very depths of the 2008 - 2009 bear market and global financial crisis, when investors were extremely worried and many were asking us if they should sell and "go to cash" and then "get back in" when things looked better. 

We wrote that this kind of thinking is extremely dangerous, because when the market turns it happens so rapidly that it is shocking, and that the further it moves up the more difficult it becomes (emotionally) for those who got off to buy back in -- often resulting in tremendous losses for those who panic-sold near the lows.

The timing of that advice was extremely note-worthy, in that it was published exactly one week to the day before the very bottom of the 2008 - 2009 financial crisis. The market reached its low on March the 9th of that same year and subsequently rebounded extremely rapidly. In fact, as we noted in another post about one month later, the Nasdaq index had moved up 30% from its lows in the weeks following the March 9th market bottom.

Note well that we have always counseled that both individuals and institutions can only successfully avoid fire-sale situations if they have planned properly for their budgetary needs: the only thing that should ever be committed to equity investment is long-term capital.

Additionally, we must also point out that we have always emphasized very strongly that we do not invest in markets and we do not advise owning market indexes (whether in the form of index funds or ETFs): we own companies which we research very carefully, whose businesses we understand, and which are positioned to take advantage of long-term narratives which may take years to be fully realized. 

We invest in those companies through the inevitable cycles of both markets and the economy itself, for as long as we judge those companies to be led by competent management teams and positioned in front of fields for future growth, and we sell them when those conditions are no longer met. We do not recommend that investors just "buy-and-hold forever" and we certainly do not recommend that investors "just buy the market."

The benefit of our type of strategy is that we are regularly in contact with the management of our companies and able to "take their pulse" as to what is happening in their respective businesses.  That is a process we find invaluable in times like these as they provide us with the confidence that these are solid businesses that are well-positioned to rebound when the tide turns, as it inevitably will!

While we still hold to the view -- as stated in our commentaries over the last couple of weeks -- that the reaction to the coronavirus has been overblown, it is now more than obvious that we are going through a market down-cycle, and it is also now clear that we may also go through an economic down-cycle as well (potentially resulting in a recession).     The good news is that the economy was in relatively good shape prior to the onset of the coronavirus outbreak and the more-recent oil-price volatility, although there will certainly be some sectors of the economy that will be impacted more than others.

Our advice to investors is to remain calm and remain invested with long-term money that has already been committed to business investment -- and to the degree they can we recommend that those who have long-term funds to invest begin doing so now.

There are many examples of investors who sold at the panic-lows in 2009, as well as in 2002 and even going back to 1987, and who never got back in at anything near the prices where they sold, because the snap-back when it finally happened was so sudden and so violent that they missed moves of 25% or more, and then it became emotionally difficult for them to buy back in as the prices continued to go higher.

Now is not a good time to panic.

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

The "Hissy Fit" Continues

As of this morning, March 9, 2020, we are witnessing a continuation of the "hissy fit" in markets that we wrote about last week.  Within a few moments of the market open, markets were halted across the board on the NYSE and NASDAQ due to "circuit breakers" that kicked in when the market dropped 7% in the session.  Since that time, markets have stabilized a bit and have been somewhat orderly since reopening, now down about 5%.

Of course, those values can change in a heartbeat as markets in this type of environment can move wildly in very short periods of time.

It is notable that today is the 11the anniversary of the market bottom during the 2008-2009 financial crisis.  That bottom happened on March 9, 2009.  Is this the bottom of this decline?  We have no idea.

The S&P 500 at this point is down over 16% from its highs set just recently on February 19, 2020.  Factoring in the low hit today, the market was down almost 19% at that point from its highs.  It would seem this selloff, rapid as it has been, may be getting close to its last leg down.

As we previously stated, we expected a correction in markets could happen at any time and have been warning our investors that such an occurrence was normal, and healthy.  Clearly this has gone further than the typical "garden variety" correction, but it is certainly not unprecedented.  In fact, as recently as the fourth quarter of 2018 the markets experienced a similar selloff.  In that instance, the markets recovered relatively quickly and 2019 was one of the stronger market returns in years.  We expect this correction will be similar.

The culprit has clearly been the reaction the world has had to the fear of the coronavirus outbreak, although this morning, the trigger was also the spat between Russia and Saudi Arabia over their failed attempt to collude on oil production.  This has sent oil prices (already off considerably from recent highs) down over 30% in the session.  Consequently, we are seeing further panic over what all these factors will mean for global economic growth.

We have not changed our view from that of last week; we think the reaction has been overblown from almost all angles.  We believe the panic due to this virus has been much more damaging than the virus itself and we believe that when the dust settles that point will be proven.  As for crude oil prices, one can make an argument that lower prices are good for economic growth just as much, if not more, than one can argue lower prices are bad for economic growth.  Simply put, market forces will sort this out and it will likely not factor that much in the overall economy.

We have a saying in our shop "we don't do the market".  What we mean by that is we don't make market calls as a factor in determining what companies we want to own.  We believe that analyzing the business in which our companies participate is much more useful in determining how long term value is created.  On that front, we are extremely pleased with the progress our businesses are making.  Keeping focused on the business centers us and keeps us confident when the market is having one of its hissy fits (or panic attacks, as the case may be).

Not doing "the market" doesn't mean we pay no attention to market prices.  Quite the contrary, we believe smart investors can take advantage of downturns like this and add to their investment accounts.  We urge investors to start making such additions if they haven't already.  Additionally, we look at these downturns as opportunities to add to positions in our portfolio and often add new positions when they are "on sale".

Lastly, we would hope that cool heads will prevail in this mess.  The "crisis" industry (the media) is having a field day playing on fears.  However, in our view, reactions that have included cancelling events and telling everyone to stay home is irresponsible.  Unfortunately, the exact opposite is what organizers of these events think.  In monitoring the statements from the Center Disease Control and the World Health Organization, the folks who have succumbed to this virus are sickly and elderly in almost all cases.  The incidence of this disease causing death is about the same as the flu, and the overall numbers are drastically lower as the flu has already claimed tens of thousands of lives this year, as it does every year, and yet we don't have this type of reaction to the typical flu that comes around like clockwork every year.

As we have previously stated, this is not to understate the effects of this virus on anyone afflicted by it.  However, we believe rationality is in order, to say the least.  To that point, we also hope that policy makers do not overreact either.  We have long argued the the "crisis mentality" that has been a hallmark of the 21st Century in reaction to the "crises" that this century has experienced, has served to cause more problems than it has solved.  Level-headed calm is what is needed in times like this.  Policy-makers will do well to be the leaders in acting rationally.

We've been through many of these periods in the past and will come out of this one just as favorably as we did the previous episodes.  As our mentor Dick Taylor used to say all the time: "on any given day, about 1% of shareholders price our companies.  Don't let 1% of shareholders tell you what your companies are worth!"

Good advice from a sage and successful investor.  We heed that advice!


Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.