“It is as if the mission of modernity was to squeeze every drop of variability and randomness out of life – with the ironic result of making the world a lot more unpredictable, as if the goddesses of chance wanted to have the last word.” – Nassim Nicholas Taleb, Antifragile: Things That Gain from Disorder
To Our Shareholders:
We hope this letter finds you and your loved ones safe, well and managing the best as can be expected in this crazy and difficult time. One important benefit of having been in the investment business now for 100 years is that it can provide useful perspective when a crisis strikes and markets run amok. As we write, while there is some light at the end of the tunnel, COVID-19 continues to wreak havoc on world health, our global economy, and our capital markets. The bull market that we have enjoyed over the last 10 plus years, characterized in part by rather reassuringly tepid market volatility, came to an end in mid-March, as large portions of the global economy shut down, corporate earnings rapidly retreated, unemployment spiked, and virtually all major market indexes collapsed into bear market territory, declining by more than 20%. Coming on the heels of last year’s extraordinary equity market performance, this abrupt and sharp downturn was and is, understandably, deeply unsettling for investors. We have mentioned in our past letters that highly valued markets can sometimes fall victim to “black swan” events that were entirely unforeseeable. This time around, that dark bird came in the form of a virus that quickly developed into a pandemic.
While it is impossible to relieve the financial and psychological stress we are all facing due to the onset of COVID-19 and the continued uncertainty around the duration of its economic and social impact, we want to assure you that we have taken what we believe are reasonable steps to protect our business, our employees, and our clients’ assets. In many respects, we’ve been prepping for something like this since the attack on the World Trade Center in 2001. Since then, we have maintained a disaster recovery site, focused increasing attention on physical and cyber security, and made sure our employees were well equipped to work remotely if need be. That preparedness is being rewarded today, as most of our firm has successfully been working remotely now for a couple of months without a significant glitch in our operations. We are incredibly fortunate to be in a business where so much of what we do can be facilitated by phone and computer. To that end, we have continued to hold our regular research meetings, and to meet with clients and companies via teleconferences and videoconferences. Our traders continue to efficiently buy and sell securities; our account administrators continue to reconcile accounts on a daily basis; and our IT professionals remain vigilant to maintain the security of our online communications and assure we have the bandwidth we need to research securities, communicate and interact with each other, and transact. All the while, our legal and compliance professionals seek to ensure that we are doing all of this while complying with relevant industry rules and regulations. While we, of course, miss the face-to-face contact with our fellow employees, peers and current and prospective clients, very little else has changed with respect to how we manage our business and your money.
In mid-March, we began to take action to assure the safety and wellness of our employees by directing those who had shown any signs of respiratory distress, or who were immunocompromised or had family members who were immunocompromised or had shown signs of respiratory distress, to stay at home. Also, we asked commuting employees to avoid using mass transit, and to restrict all non-essential business travel. In addition, we required key employees with similar job functions to work in separate locations, either in our offices in Stamford, our business continuity offsite in Wilton, CT, or at their homes. Currently, the vast majority of our employees are working from home.
So where does all this sturm and drang associated with the coronavirus pandemic leave us? We certainly do not want to leave the impression that we are overly smug or naively optimistic about the outcome. However, while we remain deeply concerned about this unsettling turn of events, we do not believe that this threat is likely to substantially impact our longer term approach to markets. Thanks to Benjamin Graham, as investors, we never lose sight of the fact that when we buy a stock, we are actually purchasing an ownership interest in a real business enterprise that has a value which is more often than not independent of the price at which the business trades in the stock market. To Graham, and to us, the essence of investing has always been to try to exploit discrepancies between those two prices … to buy bargains in the market. Over time, the stock price can be quite volatile, moving up and down depending on any number of exogenous factors that often trigger overreactions from investors. The underlying estimated intrinsic value of the business tends (in our view) to be far more stable. We focus our attention on our estimate of the business’ intrinsic value, and when we believe the stock market misprices that value, we pounce. When the stock market prices the business at a level that meets or exceeds our estimate of its underlying value, we will often trade our shares back into the market. In the interim, we seek to capture the spread between price and value, and participate in the growth of the business’s intrinsic value.
At times of crisis like the present, challenging markets will offer up opportunities, and taking advantage of them when they appear is, in our view, the essence of successful long-term investing. We have been very busy over the last many weeks, and we have done our very best to proceed thoughtfully, and at a measured pace, to evaluate and take advantage of what we consider to be the best of an increasing number of potential pricing opportunities that have come our way. And while it may seem counterintuitive, at times like this, we actually begin to feel better about our prospects for future returns. That said, we believe our and your ability to have a successful investment experience depends in large part on the willingness to “stay on the bus.” The ride can be bumpy, but we believe you ultimately have to stay on board to have any chance of reaching your destination. As Margaret Thatcher famously said to George Bush, Sr. just before the start of the Kuwait War in 1990, “Remember George, this is no time to go wobbly.”
Investment Performance
With a large portion of the global economy completely shut down in mid-to-late March due to the coronavirus pandemic, very few companies either in the U.S. or abroad were able to avoid the financial carnage that followed. Equity markets became wildly chaotic in late March, selling off as much as 30% to 35% from their highs before regaining a significant portion of the loss as investors began to, ill-advisedly or not, look forward to financial life beyond the virus. As we write, global equity markets for the most part remain about 10% to 20% below their pre-pandemic highs. The Tweedy, Browne Funds have not been immune to the collateral damage this virus has imposed on our capital markets. Year to date through April 30, 2020, all four of our Funds were down between approximately 17% and 20%.
While most stocks are down year to date, it is interesting to note that growth indices have declined by roughly a thousand basis points (10%) less than their value counterparts during this downturn. That has generally not been the case in previous bear market sell-offs, periods when value stocks have traditionally held up better. The FAANGs (Facebook (FB, Financial), Amazon (AMZN, Financial), Apple (AAPL, Financial), Netflix (NFLX, Financial), Google (GOOG, Financial)(GOOGL, Financial)) and Microsoft have continued to outperform, and have provided much needed ballast to capitalization-weighted indices. Equal-weighted indexes and value indexes have underperformed cap-weighted and growth indexes by meaningful margins. In fact, the two most highly priced FAANGs in the eyes of most value investors, Amazon and Netflix, are actually considerably in the black year-to-date through April 30. So the defensive character of value investing has not shown itself this time around, at least for now. However, we may still be in the early innings of this volatile market environment. The dotcom bubble decline, which began in March of 2000, did not come to a bottom until late 2002. The market declines during the financial crisis began in late 2007, and did not bottom until March of 2009. It might be a bit early to grade the defensive character of value, or of the Tweedy funds for that matter, based on a month or two of market turmoil. We encourage our investors to stay tuned.
If there is a sliver of a silver lining for our Funds, particularly for our flagship Global Value Fund, it has been its strong performance relative to most value indexes and its value peer group. According to Morningstar, the Tweedy, Browne Global Value Fund has ranked high in virtually all standardized reporting periods for its peer group, “Foreign Large Value Funds.” When value eventually comes back into favor, as we believe it invariably will, we would expect the Fund to perform well on an absolute and relative basis. On this note, highly respected quantitative investors such as Rob Arnott and others have recently pointed out that the value style of investing has never been cheaper relative to the growth style of investing. If the past is prologue, the teetertotter will shift at some point, and in our view, probably sooner rather than later.
