“In investing, what is comfortable is rarely profitable.” – Robert Arnott
Let’s start off with some accurate numbers for last week and February, painful as they may be. Over the last five days, the Dow fell 12.36% and 10.07% in February. The S&P 500 was down 11.49% for the week and 8.41% for the month. The NASDAQ dropped 10.54% over the last five trading sessions and 6.38% for the last thirty. Clearly, the last week was rough, quite rough, if you were an equity owner. Of course, there have been prior periods where similar drops have taken place. In those circumstances, the reasons were definite. In the internet bubble period, equities were valued incorrectly because of over enthusiasm for businesses which had nothing supporting them. In the financial crisis of 2008, poor underwriting and excessive leverage among banks and major insurance entities tied to the housing market caused the selloff. In the case this week, well, we have a virus which has spread throughout the world. It is affecting supply chains of businesses which source their supplies from China. Other multinational corporations have operations in China which have closed. Some of these are now beginning to reopen. As is always the case, investors sell first and ask questions later. Mr. Arnott, quite an accomplished investor, provides advice which you might take to heart.
You see, when it comes to investing, the dominant emotions of fear and greed are always present. A few weeks ago, I mentioned the stock prices of a few companies that are considered quite speculative. One was Tesla and the other was Virgin Galactic Holdings. Both suffered much more severe drops than the market over the last five days. They are examples of fear and greed occupying investors and what happens to the price of the stock during excesses of each emotion. Fear and greed are what you can use to your advantage in an effort to obtain pieces of the best businesses you can own. Great businesses are not easy to acquire at fair prices. Buying a beautiful home at a beach front location is usually going to require quite a large price, especially in places where most of the population enjoys. The same holds true with stocks. The vast majority of occasions you aren’t going to be acquire a magnificent company for a fair price. However, once in a while things happen where other people lose their cool. They get scared. The world most certainly is ending. And all of a sudden, well, maybe it is time to take a look at companies you want to own. One investor who has done this for a long time is Ron Baron, the Chairman of the Baron Funds. There is a lot to learn from Mr. Baron, who has built a fund company with over 25 billion dollars of assets. He has a large position in Tesla (no, we do not). There is a nice interview I have linked to in Barron’s you might want to take a look at.
As far as the Corona Virus is concerned, it certainly has the investment world concerned. We saw this with SARS many years ago, and in time, society found a vaccine. It is a shame so many people lose their lives to these kinds of medical issues. From a statistical perspective, however, much of the hysteria around Corona is unjustified. Here is a nice article that sums up the numbers and provides more context. From an investment standpoint, the following is a link to another piece of information which discusses the valuation of stocks before the virus, and past situations as well.
On the earnings front, Palo Alto Networks, HP, Home Depot, Dine Brands, Square, and Booking Holdings (used to be Priceline) all beat estimates. Not much made a difference this week as the vast majority of stocks (75.25% on the NYSE and 64.62% at the Nasdaq, according to Barron’s market data page) fell. The Federal Reserve announced on Friday it is prepared to cut interest rates as a way to counteract the risk of the corona virus on economic activity. So, Jerome is on the job and ready to help. Good to know the Fed is paying attention.
Speaking of government, today is the South Carolina primary. Joe Biden will probably win big, so he still has a pulse. Tuesday is the day to watch, as sixteen states will offer voters the chance to choose their preferred candidate. The biggest prizes are California and Texas. California looks all but locked up for Bernie, and he leads in Texas as well. If he has a big night, which looks to be the case, he would solidify his status as the front runner and have an inside track to the Democratic nomination. If you are a capitalist or a free market advocate, it is a prospect which is quite disconcerting. It also may be a factor in the recent selloff. The largest bond investor in the world, Jeff Gundlach of Doubleline Capital, has made his feelings about the subject. All in all, the world is watching our markets and our election, and we are as well.
Thank you for reading the blog this week, and if you have any questions about investing, please email me at email@example.com.
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Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation. The fact that Yale Bock has earned the right to use the CFA designation does not mean Y H & C Investments will outperform broad market indexes.