Back to Basics

Back to Basics

Published On: March 23, 2020

Written by: Ben Atwater and Matt Malick

The news gets worse by the minute. Second quarter gross domestic product is set to drop by more than 25%; the unemployment rate is on its way north of 10%; the S&P 500 is down 32% so far, but stocks lost 57% and 49% peak-to-trough during the 2008-2009 financial crisis and 2000-2002 dot com bust, respectively. 

50% of Americans will contract COVID-19; and 15% of those will be hospitalized; and 25% of those will die.

These numbers are merely educated guesses by a variety of experts. All the while, the range of outcomes among experts regarding COVID-19 and the economy vary widely and change frequently.

Bottom line, the news is bad and getting worse. Fear is rampant, frustration is high. We’re in a real mess.

The range of outcomes and their probabilities are wide enough that they only merit attention as an intellectual exercise. Forecasting, in this environment, is hopeless.

This means we need to get back to basics:

  • On a relative basis our investment discipline is built for crisis. We’ve always invested based on fundamentals and not speculation. Our investment process is transparent and straightforward. We didn’t stretch during the bull market and move clients to the latest and greatest bubble investments. Nor did we increase risk to reach for yield.
  • Studying more than one hundred years of stock market data shows a “triumph of the optimists.” Staying the course, no matter what – pandemics, wars, recessions, inflation, deflation, political crises, oil supply shocks, etc. – is the essential component of a successful investment plan. Selling during hard times or going all-in during good times are the two most common investment mistakes. We need to avoid the temptation of the former no matter how bad things get.
  • COVID-19, however awful, terrifying, depressing and disturbing is a short-term phenomenon. Its damage might last years, but the virus itself will not. This will be over at some point. 
  • We need to stop thinking day-by-day about investments and instead we must think out five years.  We must engage in a thought experiment where we continue to follow our investment discipline and visualize the results in five years.  We firmly believe our process will triumph. 

 
These are no doubt unique times.  We feel the stress and dislocations that you feel, but after evaluating myriad options and after extensive deliberations, we are of the mind that staying the course is your best strategy.  As investor John Templeton once said, “This time is different” are the four most expensive words in the English language.

Essays:

Saving

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Loss Aversion

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