Auour Insights -To State the Obvious
To state the obvious, this economic downturn has been sharp and painful to many. Though undoubtedly still painful, it has been less so for our clients. We have been warning of a growing instability within the financial markets and also preparing to weather it for quite some time. Although no one likes to see losses in their investments, the year-to-date losses our clients have experienced to date have been far less than their respective market benchmarks (in many cases it has been 40-70% less).
Our mission from day one has been to guide portfolios through good times and bad, with the goal of capturing nearly all the positive aspects of the market and greatly reducing the downturns. To date, we have been successful.
Periods of immense volatility, even when we are defensively positioned, can be uncomfortable. People often feel frightened and out of control. The headlines are scary, and every day the news is refreshed with even worse news. The market plunge seems to confirm people’s deepest fears. During this time, we would like to remind all readers of one of our favorite Warren Buffett quotes, “I simply attempt to be fearful when others are greedy and greedy when others are fearful.” We have crossed that chasm, as the market participants have swiftly turned fearful… and with conviction!
Selling after the market’s drop requires one to have conviction that the worst is not past. Unfortunately, when people are wrong-footed, they tend to sell out of regret, not from a position of strength. We made certain moves out of the market last year in late August. In times like this, hindsight wishes the moves were even more significant, but investing is an imperfect science, especially over short-time periods.
Patience is the best practice at this time. Given the overtly conservative position we are in (between 45 to 65 percent cash and short-term treasuries), we can afford to be patient and look for opportunities. At the moment, those could be buy opportunities or they could be sell opportunities. If our signals weaken further, we will look to sell more on short-term rallies (which will occur). If our signals strengthen, we will look to buy on dips (which will occur). With uncertainty about how fast the virus will spread and when it will eventually be contained, and its impact on the global economy, now is not the time for bold moves from our already conservative position. Now is the time for watchful waiting and rigorous analysis.
We have written over the past ten months that instabilities were growing around the globe. We had no idea what domino would fall and how many more would cascade. But our signals provided conviction that when the emperor realized he wasn’t wearing any clothes, the event could result in a large dislocation, which caused us to raise significant cash among all our strategies. Now, we are seeing those fears come to life. Our signal analysis has been good over the past seven years, and we continue today to act in the same stable and unemotional manner that allows us to act with confidence in their effectiveness.
As markets fall and jump rapidly, please keep in mind that the moves are the results of emotion and forced selling due to varied situations such as de-leveraging. These abrupt market movements do not have a history of producing a reliable signal of long-term value.
Although it might be tough to see at this moment, we remain optimistic on the future. Households are in a much stronger state than they had been during the last bear market. We have a large generation of workers that are young and will drive decades of growth. And market valuations are more reasonable now. This downturn, like all others in the past, will end with a strong recovery. We stand in a better position now to take advantage of it. Remember, the goal is to sell high and buy low.