This is, in all likelihood, not the beginning of the end of the Coronavirus epidemic.
My hope is that it is, at least, the end of the beginning.
There is still much work to do by our healthcare workers (thank you!), our regulators and legislators.
We all still need to play our parts, too.
So it's much too early to start a big picture 'What we learned..' article.
And yet, there are some things that have become very clear, thus far.
One of the problems with the human condition — though probably an evolutionary benefit, to keep us optimistic and hopeful — is that we too quickly either forget the lessons of the past and/or we don't spend long enough thinking about what those lessons might be.
I'm going to start a draft list, below. Some of them might change. Most likely won't.
But, in the interests of capturing what's on my mind, and sharing them so we all might proceed a little better informed than we went in, here is an unordered list of some of the investing thoughts I have right now.
1. Cash is King
Yes, it always has been, but it's never quite so important as when you need it, but don't have it. It's a lesson investors and company managers seem destined to never remember, until it's too late, but during the next bull market, when shareholders are clambering for more dividends and more debt, remind them of 2020.
2. Debt Kills
Debt kills companies, when the expected revenue fails to materialise. You never see pandemics, recessions or other downturns in financial models. Remember that.
3. Debt Kills (#2)
"Why shouldn't I use a margin loan?" is a question I get asked a lot. The answer is: March 2020. I haven't seen any stats, yet, but decent, reasonable, otherwise sensible people will have been wiped out during this crisis. Many will have debt where once they had assets. Please, don't use margin.
4. Company 'Guidance' is, and always has been, dumb.
"Pundits forecast not because they know, but because they are asked" is a line I've always loved. If John Kenneth Galbriath was alive today, he might have said 'Companies give guidance not because they know, but because they are asked'. Yes, Coronavirus is a true black swan as a pandemic. But even without it, giving guidance is dumb. No CEO (unless you're in a contracted-revenue business, and even then contracts can be defaulted on!) can possibly know, with anything even close to certainty, what will happen in 6 or 12 months. They're guessing, and will either be wrong, or will spend their waking hours torturing staff, customers and the numbers themselves to deliver on that 'guidance' — and the long term impact on the company be damned. If one good (investment) thing can come from this, please let it be the death of guidance.
5. Most Black Swans are Grey, Not Black
The idea of the 'Black Swan' event was created to describe something we couldn't reasonably have expected, based on what we know. Once it entered the lexicon, everything became a Black Swan. This pandemic is a reminder that if you can see it coming, it's not a Black Swan!
6. No-one knows anything (about short term market movements)
Did anyone forecast a pandemic-driven 35% fall in share prices from top to bottom? Did anyone forecast shares would be up 20% (at the time of writing) in less than 4 trading sessions since Monday? So, why would I, you or anyone else, listen to people who say they know what'll happen next?
7. The share market isn't the real world
I could write an essay on this one, from a dozen different angles. But here's the simplest: The pandemic is getting worse, this week, while share prices are improving. I don't know what happens next, either from a health or financial markets perspective, but I know this: there is no linear relationship between share prices and the real world. Don't invest as though there is.
8. Generals fight the last war
That's an old military maxim which suggests that the Brass spend so long learning from the last war, and perfecting their strategy to do better next time, that they can forget the next war is almost always going to be fought differently. I imagine it's probably apocryphal, but it's a good reminder. Most people expected the cause of the "next" downturn, after the GFC, to be housing debt and a Chinese hard-landing. Turns out it was a virus that, unlike past ones, got out of control.
9. Be careful of the last 'peace'
I made that line up, to sit as the corollary of the previous point. A mistake I made this time was looking at SARS and MERS, and figuring that the Coronavirus would be similarly contained. It wasn't. That doesn't mean we should jump at every shadow, either, but it's a reminder that each circumstance is different. (My guess is that at some future point, when another new virus is detected, the market will meltdown before asking questions. And, probabilistically, at least, that virus is more likely to be like SARS than Coronavirus. "The last war…")
10. Emotions are wonderful… awful… wonderful… awful
You don't need me to tell you the past 5 weeks have been an absolute roller-coaster. Physically and financially, the news has been tough to take. Concern, despair, hope, resignation, hope again. You'd have to be a robot for it not to have affected you. I was hopeful early on. As the market fell, I thought (hoped?) it was an overreaction. Then it fell. And fell. And fell. Stocks that were originally profitable investments turned red. And the red got redder. Some of my biggest winners fell like stones, wiping away months (in a couple of cases, years) of profits. It's hard to be hopeful and optimistic during those times. The doubts creep in: What if they're right? What if we fall so hard and so far, it takes years to climb back out. Truthfully, no-one knows either way. And when share prices are falling, stories of doom feel even more compelling than when prices are high, don't they? Guard against letting your emotions take charge.
11. Automation wins
Our co-founder and co-chairman, David Gardner, tells the story of picking stocks during the GFC. Paraphrased, he says "I didn't want to pick stocks. I felt awful, thinking that as soon as I'd released a recommendation, the share price might fall further. It was hard". Then he adds "Some of the companies I picked during the depths of that time have been some of our biggest winners, since". David's (US) service, Rule Breakers, like some of ours here in Australia, picks stocks every single month, regardless of where the market is at. It's essentially dollar-cost-averaging at work, and it stops us trying to second-guess where the market might be going in the short term. It also gives us the discipline to keep buying, even when doing so is hard. I think all investors should do the same.
12. Humans are really bad at timeframes
The ASX (was) down 35% or so from its February 20 highs. As if that's the only date that matters. I mean, sure, if you'd bought every single stock you own on February 20, you're pretty unlucky. But if you'd owned them for a while, here's where we are at the time of writing: down 22% from the beginning of the year. Down 15% over the last 12 months. Down 7.8% since January 1, 2019. In fact, when you include dividends, the ASX 200 is down only 2.9% over the last 15 months. Sure, I'd rather have sold at the top, too, but my crystal ball is broken. If I'd said, in January 2019, that you could take 15 months off and your portfolio would be down 2.9% by today, you'd be disappointed, but I doubt you'd feel as bad as many people do right now. Perspective matters.
13. Redundancy is not a dirty word
These days, our lives — at a personal, societal and corporate level — are built for efficiency, not for volatility. Hopefully, our governments (and companies) will build more redundancy into their respective systems from now on. Yes, it's less efficient to have empty hospital beds, underutilised public servants and "too much cash" on company balance sheets, but it's a blessing to have them when you need them. Like now. Engineers call that 'redundancy', but we can call it 'dry powder' or simply 'in case of emergency, break glass'. The same is true of our financial lives — we should have more cash and less debt, because you just never know when disaster might strike, and you'll wish you were better prepared.
That's it. For now.
I have no doubt there'll be many, many more lessons learned in the next 3, 6 and 12 months. I might change my mind on some of the above, and I'll almost certainly add to that list.
I do want to say, for what it's worth, that I think it's likely (very, very likely) that we're heading for a recession. It'll probably be deeper than anything in recent memory, and its duration is uncertain. I'm hopeful it's short, but it may not be. But again, remember that stock markets don't track the physical economy on a 1:1 basis. Be wary of extrapolating one to the other.
In the meantime, I want to leave you with something I tweeted this morning. It was two headlines from the Sydney Morning Herald's 'Markets Live' blog, accompanied by some text.
The first headline from yesterday afternoon read:
"Three days of gains, leaving the [ASX 200] up 16.2% from Monday's low"
The second, from this morning:
"Dow surges into bull market after fastest bear market in history"
And I wrote:
Please, tell me again how you knew what the market was going to do in 2020.
Or how the crash was going to continue.
(No, I had no idea, either. The difference is, I didn't make predictions.)
Similarly, I don't know what's going to happen next. No-one does.
But I remain convinced that buying a diversified portfolio of quality companies, using dollar cost averaging, and holding them for the long term, is the smartest investment strategy.
The best lesson, perhaps, is the one in my last sentence: a reinforcement of one we've known all along.
Fool on!
