Financial market volatility has escalated over the last few days, reflecting a great deal of uncertainty. With investing, we believe it’s particularly important to be aware of what we don’t know. One of our favorite quotes is credited to Mark Twain, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
In today’s environment, there are clearly far more unknowns than knowns. We don’t know when the coronavirus will be contained, therefore we don’t know what the ultimate economic impact will be. However, we do know that the measures taken to stem the spread of COVID-19 will have a major economic impact regardless of how widespread the illness becomes. We also know that financial markets have aggressively moved to price in this uncertainty, evidenced by the swift and furious sell-off in stocks and other risk asset classes. But we don’t know when markets will bottom. History suggests that it’s generally best to remain invested—and that markets will likely have already started to recover well before the news flow turns positive. And as painful as it feels in the short-run, after stocks experience declines of this magnitude, we know they become more attractive over the long-run—but that doesn’t mean they can’t fall further. Perhaps most importantly, we know that it’s critical to maintain a disciplined, long-term approach and to utilize a sound asset allocation framework to guide portfolio decisions.
Please see the attached presentation, providing an update on the recent market backdrop and sharing our perspective, including some thoughts on portfolio strategy (and activity generally being implemented across portfolios).
We’ve shared a couple of additional quotes below from our recent reading.
From Seth Klarman of Baupost Group: “While is it always tempting to try to time the market and wait for the bottom to be reached (as if it would be obvious when it arrived), such a strategy has proven over the years to be deeply flawed. Historically, little volume transacts at the bottom or on the way back up and competition from other buyers will be much greater when the markets settle down and the economy begins to recover. Moreover, the price recovery from the bottom can be very swift. Therefore, an investor should put money to work amidst the throes of a bear market, appreciating that things will likely get worse before they get better.”
From Ben Inker of GMO: “While there will be a severe short-term economic toll (whether it is officially a recession will depend on the length of the economic shutdown, which is unclear at the moment) resulting from COVID-19, we do not believe it will have an enduring impact on the fair value of global equity capital. The fair value of equity markets has been remarkably stable historically; the only events in our experience to truly impair it have been major wars, the Great Depression, and, for global banks, the 2008-2009 Global Financial Crisis (GFC). Most recessions, even deep ones, do not leave a lasting mark on the economy or the financial markets, nor have previous global pandemics.”