COVID-19: chaos and opportunity
“This time it’s different.” Every panic in the past has garnered this label. This one certainly has a right to claim it is different as well. What we are seeing in financial markets right now is, by some measures, an unprecedented amount of volatility. Treasury yields are falling fast (meaning investors are pushing a lot of money into “safe” Treasury bonds, therefore driving down yields), equities are falling, and the major oil market controllers appear content to do their part to wreak further havoc.
The Covid-19 fears gripping the country right now may very well get quite worse before they get better. For investors with extremely long term time horizons, this is the sort of volatility that must be weathered in order to be great long term investors. It certainly does not make sense to “buy high and sell low.”
A few notes on how I’m managing portfolios in relation to this crisis:
I have been preparing for this opportunity. In a note to our team at Meridian on 2/14/20, I said, “smart people are making reasoned predictions that China won’t be the only place battling this on a large scale in the coming months… There’s plenty of talk out there about the virus’s impact on the Chinese economy (which makes up 16% of global GDP), but not a lot of talk yet that I’ve seen regarding economic impact of a more widespread event. At a minimum, it seems worth considering the possibility.” This widespread event is now upon us.
Even without the coronavirus fears, stocks were already trading at “expensive” levels. Pandemic fears have been a wonderful excuse for some market participants to sell-out equity positions.
So, where does this leave us? Investors with cash positions might consider legging into quality companies at better valuations than we would have been able to one month ago. We also look at using hedging strategies in the event that what we are currently seeing is the beginning or middle of the panic and not the end. We want a portfolio built to reward long-term equity positions while withstanding and minimizing short term volatility when and where we can. Diversification remains a wonderful tool.
I said earlier, there are some ways that “this time is different.” But in the big-picture sense, this time will *not* be different. And that big-picture sense is this:
When markets panic, investors with a time horizon long enough to withstand short term volatility will be rewarded by putting their capital to work (or keeping their capital at work) in a depressed environment. For the new investor, the opportunity for long term profit increases as markets decline.
Just like bank investors after the market crash of 08-09, this current sell-off will create opportunities. Finding them is the key. The wisdom of perhaps the greatest investor of all time continues to echo through my mind:
“Be fearful when others are greedy, and greedy when others are fearful.”
– Warren Buffet