A wise man should consider that health is the greatest of human blessings, and learn how by his own thought to derive benefit from his illnesses.
When a person gets sick, there is usually some indication there is a problem with the body. Maybe its a high temperature, an upset stomach, regurgitation, or plenty of trips to the bathroom. Being ill is no fun, and healthy people take measures to remain that way. Eating a well balanced diet, exercising regularly, sleeping eight hours, and avoiding stress are all actions most doctors will tell you are keys to a strong immune system. It helps make the body able to fight off most of the obstacles to a healthy lifestyle. However, there are situations which are unpreventable and can be the source of a health concern. Based on the initial market reaction to the Corona virus, the vast majority of investors, including myself, did not project it become a pandemic. The largest problems in took place in China, then Italy, and Iran. Thousands of people in these countries caught the virus, and the concern is that the United States is not prepared for its severity and potentially exponential spread. In the United States, the sudden realization of the potential dimension of this virus has now restricted travel to Europe, Ireland, and now the UK. All major sporting events, including the NCAA Tournament, and NBA and NHL games, have been canceled. Clearly, the Corona virus problem is first and foremost a health crisis. It’s affect will be economic, and the extent of the severity is what is troubling investors. Of course, there is another situation which compounds the market’s concern, which is the largest producers moves in the oil market.
Last week on Sunday night, news got out that Russia and Saudi Arabia failed to agree on a production cut to balance the over supply of oil across the globe. Demand dropped because of airlines canceling flights, especially to China and throughout Asia. Rational decision makers might decide its in their best interest to work together to be flexible in supplying their end users. Note the term, rational. We mention the Saudis and Russians because they are the source of the disagreement. The Russians said no to the Saudis request to cut production, transmitted through OPEC. ‘Nyet’ meant a price war, and Sunday night, the Saudis decided to open up the spigots, reduce price dramatically on their oil, and declared nuclear winter in the market. The Russians wrath is really aimed at US shale producers, the takers of market share over the last 5 years. On Monday morning when the market opened, oil prices were down thirty percent. In one day. It took six minutes for equity markets to hit the circuit breaker at limit down. On Thursday morning, it took five minutes, then again another 10 minutes later. Anything oil or energy related got crushed. Same thing with travel, airlines, events, financial’s, and especially gaming. When the market closed on Thursday, stocks were off nearly 20 percent for the week, and almost 30 percent in less than a month. How should investors think about current market and economic conditions?
First and foremost, let’s acknowledge that until there is a workable vaccine, society faces a major challenge in containing, testing, and treating people who come down with the virus. If prior history is a guide, the cities of St. Louis and Philadelphia show why it is important to prevent large numbers of people from gathering at an event. The difference in the number of people who eventually catch and succumb to the virus is dramatically affected by the approach taken in each municipality and state. The United States is in the middle of preparing for the virus in the hope to contain it’s spread. The oil issues also will be with the market for a while, maybe another year or more. On the investment side, the stock prices of many excellent companies have come down dramatically. There are many companies which have done a very good job with their businesses, only to watch as their stock prices show no reflection of the years of hard work they have put in to build their enterprise. As we stated a week ago, once in a while things happen and one gets a chance to buy great businesses at fair prices. Over time, and it may take six months or a year for society to return to per-Corona activity, equity prices gravitate to a price based on the company’s ability to generate cash and grow. Their liabilities and debt levels affect their operations. You have a chance to systematically research and acquire positions of companies you already own or want to own. It is important to understand what you are buying and why you are buying it. You should have a time horizon longer than three or six months. You probably don’t have to rush in to buy anything. Dollar cost averaging is typically a sound strategy. In addition, you should realize a year is a very short period of time in the investment world, and these kinds of situations are part of the business, investing, and life in general. Consider 9-11, the 2008 crisis, SARS, Ebola, elections, budget issues, and plenty of others investors have had to face in the past. They are part of the landscape. If you make a few good decisions, the benefits can last decades, perhaps generations. It is not pleasant when markets go through difficult, and unforeseen circumstances. However, as we know from Hippocrates, when you get lemons, you make lemonade.
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Thank you for reading the blog this week, and if you have any questions about investing, please email me at firstname.lastname@example.org.
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.