Investment Note - March 2020

Some thoughts on where we stand

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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 (BRK.B, Financial), Microsoft (MSFT, Financial) and Facebook (FB, Financial). 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 "serious 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 take action(s) to 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 in the interim. 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 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 that is 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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