First, let’s consider whether Coronavirus is a truly unique threat. We have had some major modern pandemics – a level that Coronavirus has not yet reached – in modern history, beginning with Spanish Flu in 1918. The most recent, the swine flu, emerged in April, 2009. It was unprecedented, spread quickly and is estimated to have infected up to 1.4 billion people causing up to 575,000 deaths globally. The World Health Organization declared the pandemic to be over in August 2010. The S & P 500 climbed 18.72% in the 6 months following the outbreak and 35.96% in the 12 months following the outbreak.
The American investor is once again being challenged to see if they can stop human nature from blowing up their investment plan. The media and its irresponsible “reporting” is on the side of human nature, spouting misleading statistics like, “the Dow Jones sees biggest point loss in history.” While factually correct, when considering the level of the Dow prior to the drop (about 27,000) the percentage decline of 4.42% doesn’t even rank it close to the top 25. By comparison, the Dow fell “only” 508 points in 1987 on Black Monday (from a level of 2,247 that was a 22.6% decline). You can see that the higher the Dow goes the higher and higher the point declines will become.
The current P/E of the S & P is about 17, with a dividend yield over 2% that historically has grown at close to 6% annually (twice the cost of living). The main competing investment, the 10 year treasury, recently yielded 1.16% (P/E close to 90) and the 30 year yielded 1.67% (P/E close to 70). The extreme low yields evidence the extreme investor panic in a “flight to perceived safety.”
Moreover, 30 year corporate bonds yield a FIXED 3% as opposed to the constantly growing 2+% stock yield, which will likely be yielding the equivalent of close to 12% when the corporate bond matures. So in year 30, each million invested in stocks today will likely be yielding – based on history — $120,000, while the corporate bond will still be yielding $30,000. All of the equity price appreciation is for free!
Embrace the current price discount, increased dividend yield and increased long term value available. We will rarely see these relationships in our lifetime.
Coronavirus presents no real threat to the long term enduring VALUE of the great businesses we own, but rather to their short term PRICES. Many times, especially times like this, price and value have a relationship that investors don’t understand. It is an inverse relationship such that the higher one is the lower the other is.
For some reason, human nature (the American Investor) always processes this backwards and, unfortunately, responds accordingly. We react rationally to every economic and financial input – meaning our demand for goods and services increases as prices fall and vice versa. If the price of a sweater increases dramatically, our demand for it in other colors will decline (we will postpone the purchase or substitute the purchase with something cheaper). Conversely, when the sweater goes on sale we will buy it in more colors. This is rational economic behavior. We behave this way with every economic and financial input, with one exception – Stocks!! When the PRICE of stocks declines, we – human nature – think that the VALUE is also declining and that the risk of owning/buying them at these lower prices is increasing. Conversely, when the PRICE of stocks is high and rising (as in the 1997-2000 tech., telecom and dot com era) we – human nature – think the future VALUE of investing from these levels is also increasing and the risk of owning/buying them is decreasing. REALITY IS NOT DIFFERENT FROM WHAT HUMAN NATURE THINKS, IT IS THE OPPOSITE!
In our experience, continually REACTING to news and current events – whatever they be – to try and gain a timing advantage over the markets, rather than continuously acting on a rational plan, always leads to failure. A recent study shows that the average stock fund investor underperformed the S & P 500 by close to 6% annually for the 30 years ended 12/31/18. They also underperform the very funds they are invested in by going in and out. That means for every million dollars invested, they had close to $6 million less in 30 years, due to this kind of behavior. Regardless of the perceived threat du jour, the REAL THREAT has ALWAYS been and will likely almost certainly always be the investors themselves. IN SUM, THE BEST WAY TO PROTECT YOUR PORTFOLIO FROM THE CORONAVIRUS PANIC IS TO NOT ALTER YOUR INVESTMENT PLAN IN REACTION TO IT!
Why Such Panic?
We remain in the midst of the longest and strongest bull market in history. It is also one of the most feared and hated. Some say we have a bubble. How can we have a bubble – as rationally defined – in an asset class that Investors have been consistently liquidating for well over 11 years? WE CAN’T!
In fact, last year was one of the best performance years in this greatest of all bull markets and investors sold over $160 billion of stocks – a record since Lipper began tracking flows in 1992. If terror is the presenting sentiment at a time when the economy and markets and household net worth are all at records, it is not at all surprising to me to see this gross overreaction when there is an actual threat. Based on sentiment, we expect that the markets will likely finish the year higher than they started the year. Whether they do or not, based on below average historical returns, the Dow is likely to be at least 60,000 in 10 years and most will miss much of that growth. We believe this bull market likely has the better part of this decade and thousands of S & P points ahead of it. Lifelong successful investing is a battle between fear of the future and faith in it. One of our key roles is to help ensure our clients win that battle. In fact, that is the greatest value we offer to them.
In closing, US GDP was about $21.5 trillion in 2019. The value of the 500 best managed, best capitalized and most profitable companies in the world (S & P 500) was over $28 trillion at the end of 2019. The notion that the real, enduring value of those 500 companies is inherently and vulnerably unstable is silly. To succeed as an investor it is CRITICAL to be able to make the distinction between the shorter-term volatility of STOCK PRICES and the long-term enduring and ever-increasing value of the companies themselves. The ability to make this distinction, even as stock prices gyrate sickeningly form time to time may determine your ultimate success or failure as an investor.
“A cynic is a man who knows the price of everything and the value of nothing.”
Oscar Wilde
Please do not hesitate to call us at times like this as it is very dark out there and we may be among the few lights you will find…..it is what we are here for!