Quarterly Commentary

1Q 2020

Normal sure seems like a long time ago. As we try to make the best of these difficult circumstances, we are all wondering when life might return to some semblance of normal and when and where the market will find its footing.

It would be nice if there were precise answers to those questions. Beset with challenges never faced before, we devour the latest news and predictions, but whether looking at the virus or its effects on the economy, we have limited data and as yet no reliable models for using it.

This is a problem for many investors. Much of what passes for investing today – indexes and ETFs – is really just going along for the ride. With stocks and bonds rising with little interruption for almost eleven years, it has been easy to stick with the upward trend. With the trend now broken, many are unsure of what to do next. 

The focus should return to valuations, yet value is assessed in the context of the current and future economic world. That the future is uncertain is an understatement right now. Many see that as a reason to stand aside and wait until consensus views develop regarding the courses for disease and economy. 

Instead of throwing our hands up, we have envisioned two outcomes – a base case that involves severe economic disruption for two to three months and a dire and hopefully far less likely scenario where people and businesses remain locked down for longer, perhaps six to twelve months. Our research team is adjusting valuation models to reflect the business interruption and a gradual transition to a future normal.  

We’ve always described ourselves as long-term optimists and that remains the case today. While we are confirming that our holdings can indeed ride out an extended lockdown, we find reasons to hope for the shorter, more favorable scenario:


  • Even as larger numbers of new cases are announced in the US, Italy and other nations where the pandemic is further advanced are reporting the number of new cases is flattening and may be declining.
  • We are learning about new diagnostic tests that are being rushed into service. Some take minutes instead of days to identify those requiring isolation or treatment.
  • Progress is also reported on tests for antibodies in the bloodstream that indicate whether that person previously had Covid-19. This type of test could potentially identify those who have developed immunity and are able to go back to work or school. This is necessary for caregivers who deserve to know whether they are immune and that they needn’t worry about passing the virus on to others.


  • In the US, the speed and magnitude of the policy response have been truly remarkable. The Fed has slashed interest rates and put Quantitative Easing and lending facilities in place much faster than during the Financial Crisis. The fiscal stimulus plan was assembled in a little over a week, compared with two months for the 2008-09 package. 
  • In terms of magnitude, the $2 trillion of spending is 10% of the total US economy. The deficit spending will rise in 2020 to more than twice the deficit registered in 2009. 
  • Checks, unemployment benefits, small business loans and other measures are aimed at those most in need. Banks - now part of the solution and not the source of the problem - will be busy making loans to small businesses. Many bankruptcies can be averted. 
  • Congress may provide even more support. The alternative, a widespread and prolonged economic downturn, would cost the government far more in terms of lost future tax revenue. 

 Here’s a useful set of questions –

  • When will we get a handle on the course of the virus? Is it a matter of days before we’ll know what’s happening in New York City and other parts of the country?
  • How quickly can infection and antibody tests provide predictive data? Is that a matter of weeks?
  • If we can figure out who has it now, who had it before and who is yet to be exposed, can we start going back to work or school? What are the risks of reinfection?

If such assessments turn out to be months away, then we will probably have been too early with our optimism. 

We use a long-term perspective to assess fair value. While there will be a severe short-term recession, we do not believe it will have an enduring impact on the fair value of global equity capital. Since World War II, we can think of one instance where an important sector of the equity market saw its value seriously and perhaps permanently impaired. Share prices for the largest banks around the world still haven’t recovered from the massive write-offs and dilutive government recapitalization packages associated with the Financial Crisis. For all bear markets recorded since 1945, the average time elapsed from peak to trough to new high was less than four years. Half of these bears lasted less than two years.

We believe that our clients’ portfolios hold assets priced to deliver strong returns going forward. Prices may decline in the interim. We view the recent sell-offs as mass liquidations having little to do with value. When 95+% of stocks are down by something like 5% in one day, it seems that the throng is stampeding for the exit. 

Having confidence in this approach does not depend on being right about a specific market catalyst such as being able to predict the progression of Covid-19. Instead, our methods rely on many years of experience assessing valuations and market conditions and a willingness to bear risk when there is adequate compensation for doing so.  

This is truly a terrible episode. All the human energy and financial support being directed to the crisis will shorten the time until we can regain that feeling of normal. In the meanwhile, we focus on understanding the downside risks of our holdings. The upside will take care of itself.