Investing in stocks means dealing with volatility. Instead of running for the exits during times of market stress, the smart investor greets downturns as chances to find great investments. You should only buy when the price offered makes sense and sell when the price becomes too high. Put another way, the market will fluctuate, sometimes wildly, but rather than fearing volatility, use it to your advantage to get bargains in the market or to sell out when your holdings become way overvalued.
-Ben Graham
Adversity creates opportunity. Not often does the S&P 500 drop 35% in the span of four weeks. Even less common are the day-to-day price swings that occurred throughout March and April.
We had been quite cautious for a long time as market prices and valuations remained persistently above historic averages. Some questioned why we held cash when stock markets, which were clearly overdue for a correction, continued to rise month after month.
The first signs of a market crack appeared in late February, initially in the form of slower corporate earnings growth expectations. As news of a potential global pandemic emerged, the selloff accelerated. Subsequent decisions by governments around the world to effectively go into economic shutdown caused the market to react like a match hitting gasoline – up in flames instantly.
Fortunately, we had a lot of cash available – over 20% in many accounts. We had been waiting patiently for an opportunity to invest in both the stock and bond markets at more attractive prices, and our patience was rewarded. In what seemed like an overnight event, many stock and bond prices were absolutely pummeled. At times we couldn’t keep up with the many new and interesting potential investment opportunities that presented themselves to our research team daily. As we looked across the market landscape at the recently discounted prices of so many securities, we felt like kids in a candy store. We were working overtime, digging through financial statements, speaking with company management, and sorting out those investments we felt offered the most compelling risk/reward opportunity.
Through all of this, we continuously evaluated the prices of potential investments with an overlay of what many market prognosticators presumed would be a prolonged economic downturn. As more and more facts related to the economic shutdown became evident, we felt stock and bond price discounts had become too extreme. Nevertheless, we modeled dire scenarios to provide a margin of safety in our analysis.
To date we have committed substantial cash, in many cases taking account levels to less than 5% – effectively fully invested. We have discovered many attractively priced bonds and stocks trading at unbelievable levels in comparison to our appraised value.
At the end of the day, we are stewards of client capital – that means we must exercise great discipline when others around us are acting with great emotion. The recent chaos is a classic case in which our discipline has been rewarded.
To be sure, there will be uncertainty ahead. Our investments remain undervalued, but one of those we recently added is up by an amazing 30% in just a few short weeks. Our overall stock holdings continue to trade at close to a 50% discount from our appraised value, while our bond holdings trade at nearly a 20% discount. Both discounts are historically high, suggesting very lucrative future returns.
In closing, consider the following perspective from one of our analysts:
Some people never invested in equities for the last 38 years because…
1982 – Worst recession in 40 years, debt crisis, hyperinflation
1983 – Market hits record – “market too high”
1984 – Record U.S. Federal deficits
1985 – Economic growth slows
1986 – Dow nears 2000 – “market too high”
1987 – Black Monday, Dow Jones Industrial Average drops 22.6%
1988 – Fear of recession
1989 – Junk bond market collapse
1990 – Gulf War, worst market decline in 16 years
1991 – Savings and loan crisis
1992 – Elections, market flat
1993 – Businesses continue restructuring
1994 – Interest rates are going up
1995 – The market is too high
1996 – Fear of inflation
1997 – Greenspan “irrational exuberance”
1998 – Asian Contagion
1999 – Y2K uncertainty
2000 – Technology bubble and correction
2001 – Recession, 9/11 attack
2002 – Corporate accounting scandals
2003 – Iraq War begins
2004 – U.S. has massive trade and budget deficits
2005 – Record oil and gas prices
2006 – Housing bubble bursts
2007 – Subprime mortgage crisis begins
2008 – Great Recession in full swing
2009 – Great Recession continues, “credit crunch”
2010 – Sovereign debt crisis
2011 – Eurozone crisis
2012 – U.S. fiscal cliff
2013 – Federal Reserve to “taper”
2014 – Oil prices plunge
2015 – Chinese stock market sell-off
2016 – Brexit; U.S. presidential election
2017 – Stocks at record high; Bitcoin mania
2018 – Trade wars, rising interest rates
2020 – Coronavirus pandemic
Some will always find reasons not to invest, but no one can stop the market in the long run. Remember, one can create money by investing in a bull market, but one can create a fortune by investing in a bear market.
Your Investment Research and Advisory Team
Global Value Investment Corp.