The last 8 weeks have proven to be amongst the most volatile in investment history. The stock market historians have had to look a long way back in the annals to find anything that is close to matching the speed of the bear market and the rapidity of the subsequent bounce back. Can a bear market really only last a small number of weeks? Could a new bull market already have started? How about the economy and cuts to company earnings? Surely the recession we’re undoubtedly in will be exceptionally deep? Have the inevitable cuts to company earnings even been estimated yet? How can they have been priced in to the market?
I won’t pretend to have the answers to these questions. The future is always unknowable and in these difficult times the short-term future is even more unknowable than ever. But what I am reasonably confident of is that the course of the medium and long-term future is probably not so very different to what could have been expected a short number of months ago. The crisis is real, extremely serious and has very wide-ranging implications, but ultimately it will pass. Survival, for individuals and companies, is clearly the first priority, but for those that do, there should in time be a reasonable recovery. Of course, some industries may require significant change, supply chains may well be shortened and companies (and individuals) will have to establish greater resilience and learn to keep more in reserve for such cataclysmic events, but as a working assumption, life in a couple of years’ time (or maybe sooner) is unlikely to be that much different to life last year. We can be sure central banks and governments world-wide are trying to do the right thing. Interest rates are at all-time low levels and government support, directly and indirectly via the banks, is targeted at supporting people and companies through the crisis.
It’s often been said that in the short-term the stock market is like a voting machine, adding up which companies are popular and unpopular, whereas in the long-run the market is like a weighing machine, assessing the substance of a company. Rarely has this been more true than in the last couple of weeks. The swings in share prices for many companies has been extreme, driven, apparently, by the desperation of some to sell for cash, seemingly completely unconcerned by price or valuation. Anecdotally, much of the selling seems to have been driven by computers following algorithms – not so much concerned about a company’s valuation as perhaps, the latest tweet or media headline – or asset allocators, unable to sell assets in other markets due to illiquidity and therefore having to sell whatever they can at whatever price.
Our approach has been different. We are confident in our investments and have been taking the opportunity to add to some at much lower prices than existed just a small number of weeks ago. We have done this through selling a couple of our holdings which held up particularly well, by investing our available cash and by increasing our borrowings. We have also made a couple of new investments. These are companies we have been following for a while and the last couple of weeks have provided the opportunity to invest. We would never make new investments in companies on which we hadn’t carried out sufficient due diligence, nor solely because we wanted to add something extra or different to the portfolio, such as defensiveness, recovery potential or income. It’s impossible to know in real time whether the investments we are making will prove to be at the best prices, but we can be sure they are at lower prices than previously and have studied the companies, we are confident in their long-term potential.
All of this approach is ideally suited to our investment trust structure. We are able to take long-term views and are not driven by the short-term cash flow issues that can arise in open-ended funds. We are able to borrow to take advantage of opportunities as they arise and perhaps most importantly as we go through the largest collapse in dividend income for generations, we will be able to draw on the income reserve we have saved in better times in order to keep paying our own dividends to our shareholders.