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!!
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