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The Science of Hitting
The Science of Hitting
Articles (622) 

Investment Note - March 18, 2020

Some thoughts on where we stand

March 19, 2020 | About:

I’m writing this after the market close on March 18, 2020. In today’s trading session, the S&P 500 declined by roughly 5%. Since the market peaked on Feb. 19, 2020, the S&P 500 has declined by roughly 30%. The speed of this decline is unlikely anything I can ever remember experiencing in the stock market. Of course, I didn’t assume it was impossible or even unlikely. As Warren Buffett (Trades, Portfolio) recently noted, “Stick around long enough, you'll see everything in markets.”

Personally, despite “losing” more money – by far – than I ever have in my life over the past month, I’m honestly not that worried about what’s going on in my portfolio. In fact, I’m generally excited and optimistic on the markets. The big reason why I’m excited is because stocks are much cheaper than they were a month ago. While the current issues facing the world are likely to have significant short-term consequences, I ultimately believe that this will prove temporary.

In terms of positioning, I have ~90% of my net worth invested in equities. The remainder is in cash & short-term investments. (I include in that bucket every dollar that I would be willing to have invested.) It would be nice to have some more dry powder, but that’s always the case when stocks get cheap. It’s also nice owning great businesses at good prices.

I’ve tried to be patient so far. There is a lot happening at once, and I want to make intelligent decisions. That said, if opportunities become even more attractive, I’ll put the rest of that capital to work. Beyond that, I’m banking on that 90% I already have invested to perform as I expect it to over the coming years, regardless of what may happen in the coming weeks and months.

A large portion of my equity allocation is in companies like Berkshire Hathaway (NYSE:BRK.B), Microsoft (NASDAQ:MSFT) and Facebook (NASDAQ:FB). All have fortress-like balance sheets and will be in a position to make decisions that could materially enhance per share intrinsic value during a time of crisis. Whether they actually will do so remains to be seen, particularly for Facebook.

While that feels different than dry powder in my brokerage account, I view the cash in these corporate coffers no differently from the perspective of a business owner. My hope is that these companies will find attractive opportunities to put tens of billions of dollars to work in the near future.

Before I share my concluding thoughts, I want to make something clear: I am not a market timer. When I invest in a company, I spend no time considering where the stock may trade in the coming hours, days or weeks. If it’s cheap, I buy it, and if it gets cheaper, I will consider buying more. I completely agree with something David Swensen (Trades, Portfolio) once wrote about market timing: “Market timing, defined as a short-term bet against long-term policy targets, requires being right in the short run about factors that are impossible to predict in the short run.”

So, now that I said that, I am going to comment on something that I think is very important in the short-term. I believe that the United States government needs to take serious action to change our current course as soon as possible. By serious action, I mean they need to do whatever they can to help keep employees paid and businesses financed over the coming weeks or months while simultaneously encouraging some "seiours social distancing efforts", as Bill Gates recently put it.

If that action was taken, I think the stock market would likely mount a recovery. Again, I’m not a short-term trader or a market timer (the S&P 500 could fall another 10% or 20% before any of this happens), and I honestly am not even concerned with whether stocks will be higher a year from now. However, I believe the key to a quick recovery hinges on government policy, and whether or not the government can keep money flowing. Here’s how Warren Buffett (Trades, Portfolio) described it in his testimony to the Financial Crisis Inquiry Commission (bold added for emphasis):

“In my mind, there was only one way both the financial world and the economy was going to come out of this situation of paralysis in September 2008. And I made the fundamental decision that we had the right people in there with Ben Bernanke and Hank Paulson, and that the President would back them up. That we had a government that would take action that only the government could. It would take the action to get an economic machine that had become stalled basically back into action. And I didn’t know what they would do. I didn’t know what Congress would go with. It didn’t really make much difference. The important thing was the American public would come to believe our government would do whatever it took. And I felt it would have been suicide not to… It was a bet, essentially, on the fact that the government would not really shirk its responsibility at a time like that to leverage up when the rest of the world was trying to de-leverage and was panicked.”

Today, the economic machine isn’t at a total stall (yet), but it’s on the way. Anything related to travel, like airlines and hotels, is in trouble. And if we follow that path, it will lead to significant declines in business volumes, layoffs, bankruptcies and a domino effect that ultimately touches everyone.

The government needs to do implement decisions that will slow the spread of the virus (which make people comfortable, in time, to return to their normal lives) and help individuals and businesses get by until then. This process will clearly require both significant resources and time, resulting in a major slow down in economic activity. Personally, I think that’s a cost that we have to accept right now.

The alternative may be much worse.

I ultimately believe the government will take these steps. My portfolio is positioned accordingly. (And to be frank, I'm not sure how you can own equities at all if you don't believe that's the case.)

In conclusion, this has been a difficult time for investors and the world at large. There is plenty to be worried about right now. But there's always the case. The world is always uncertain. I think we ultimately get through this, just like we have gotten through the endless number of crises the world has faced in the past. I also believe that the high-quality companies that I own are priced to deliver pretty good returns over the long run. If they get cheaper, those forward returns will improve further.

We’ll see in a few years whether that works as expected.

Disclosure: Long Berkshire, Microsoft and Facebook.

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About the author:

The Science of Hitting
I'm a value investor with a long-term focus. My goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio - a handful of equities account for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

Rating: 5.0/5 (11 votes)

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Comments

jgarafolo
Jgarafolo premium member - 1 week ago

Thank you!

Praveen Chawla
Praveen Chawla premium member - 1 week ago

I am from the government, I have come to help!
Ha Ha Ha Ha Ha

***VIRUS***

Save us Government !!!!

snowballbuilder
Snowballbuilder - 1 week ago    Report SPAM

Hi Science tanks for sharing

I live in north of Italy so coronavirus is really a big tragedy here

Lots of people are died and dying, hospitals are under incredible stress , the real economy is shottle down and people cant go out of home if not for emergency - food - specifically reason.

News are always bad so - like anyone else - i m worried for my family and my country

But on the investments side i remain calm and confident

I think my holdings (bc.mi , dia.mi, rec.mi, tip.mi, itm.mi) are fondamentally really strong and will do well even in these really difficult time.

Itm.mi is the only new position, is an holding company that (at 31/12/2019) has 41€/share NAV (of wich 14€/share cash) priced at around 24€/share.

Dia.mi - in wich i m invested since 2010/2011 - has recently annunced that has developed a fast test kit for coronavirus. (

https://diasoringroup.com/sites/diasorincorp/files/allegati_pressrel/diasorin_covid-19_test_has_received_fda_emergency_use_authorization.pdf)

As for the market crash and market price and movement in general

- being a long term investor, having a good reserve of cash and not having any short term need –

i dont care much and i m ready to survive any bear market.

I really hope everything will go well

We will get through this.

With friendship

Daniele (Snow)

PS as usual i m not recommending of buying or selling any stocks.

I havent any idea of how the market and/or any of my holdings will perform in the future .

I m just sharing my thoughts and what i m doing in these really difficult time.

The Science of Hitting
The Science of Hitting - 1 week ago    Report SPAM

Jgarafolo - Thanks for reading! Stay safe.

The Science of Hitting
The Science of Hitting - 1 week ago    Report SPAM

Praveen - The government alone can't save us. But we - as a society - have to come together to save ourselves. And doing so will come with significant cost / pressure on individuals and businesses. I think government's around the world recognize that and are preparing to do what they can to limit the damage. We'll see. Have a great weekend and stay safe!

The Science of Hitting
The Science of Hitting - 1 week ago    Report SPAM

Daniele (Snow) - As always, I appreciate your thoughts. Stay safe my friend.

Praveen Chawla
Praveen Chawla premium member - 1 week ago

I was commenting on the sudden change in American politics, where the Trump administration is now giving far bigger handouts than Socialist Sanders could have ever imagined. Nothing like a pandemic to focus the mind on what is important.

The Science of Hitting
The Science of Hitting - 1 week ago    Report SPAM

Praveen - I read something today that rings true (to me): "In the same way there are no atheists in foxholes, there can be no truly free-market approaches to addressing a crisis like this in the modern world, as sad as that might be for those of us who consider ourselves free-market types."

Praveen Chawla
Praveen Chawla premium member - 1 week ago

What bugs me about the so-called, small government / free-market types is that they want to diminish public capacity in times of plenty and then expect the public to bail them out in a crisis. Also, the role of the government is to insure against such shocks. This means we have to build surpluses and capacity when things are going well so they can be deployed in times like these.

The Science of Hitting
The Science of Hitting - 1 week ago    Report SPAM

Praveen - I don't disagree at all. I think this situation is unique, because the virus requires us to essentially shutdown (part of the) economy, and practically overnight. When the government dictates such action - which seems absolutely necessary in this scenario - I think we need to be pragmatic in terms of what that means for businesses (both small and large), their employees, etc.

spark08
Spark08 - 1 week ago    Report SPAM

Thanks for the article. Personally, the last 2 or so weeks has been panic for me. Every single day, I am thinking of what would happen if my portfolio looses 40%, 50%, 60%. This market is unlike any other and the life after the virus would not be the same again, for sure. So, how is it possible to assume the markets and the world would be the same again? This event has changed the entire social structure of the world. To me, China has just emerged as the new super power.

batbeer2
Batbeer2 premium member - 6 days ago

>> Every single day, I am thinking of what would happen if my portfolio looses 40%, 50%, 60%. This market is unlike any other and the life after the virus would not be the same again, for sure.

Yes. If you worry about that I suggest you stop owning a portfolio or "the market". Instead consider owning pieces of businesses. There's a big difference.

Two examples:

Through EMGC you can own the life insurance policy of a few hundred octogenarians. Should 10% of them die, the company gets paid roughly $50m. That's not a bad for a $60m company. https://www.sec.gov/Archives/edgar/data/1494448/000110465920035008/tm2013082d1_ex99-1.htm

Youtube and Netflix have been asked by various countries to reduce the resolution of their vids due to a lack of global bandwidth. That might be good news for a company like Centurylink (CTL). That company is currently trading at 4x FCF or so. Centurylink owns the most extensive and fastest global network. Your Internet provider almost certainly relies on their sevices. That network is called AS3356. https://asrank.caida.org/

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