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Disciplined Value Investing in Volatile Times
In my nearly 30-year investing career, I have been through a number of stock market routs. This one ranks up there as one of the worst—if not for its depth (which remains as yet undetermined), then certainly for its intensity. The market has sold off faster than ever in history, and I have never seen more days of double-digits or nearly double-digits declines in such a short time period. This makes sense, as it’s probably the fastest drop-off in economic activity we’ve ever seen—one day, everyone’s at work; the next, everyone’s at home and all the restaurants are closed. The panic and fear are extreme, with emotion filling the void where information and analysis normally exist. Yet in every instance during my career, periods of fear and panic have presented incredible bargains; I believe this one is no different. I have learned that when it feels really bad, it’s usually the best time to allocate capital. It is painful and ugly right now, but our goal is buying the long-term survivors and compounders to position the portfolio for strong multi-year gains later.
We must behave based on data, fact and information, instead of emotion—which is not always easy to do. We don’t know when the COVID-19 pandemic will end and what the ultimate economic damage will be, but we do have some insight. China was the first to suffer a widespread outbreak. Its economy ground to a virtual standstill but is now starting to recover. Our conversations with executives who manage businesses in China tell us activity there is bouncing back. We expect the US and Europe—both currently at the front end of outbreaks—will follow a similar, though not identical, pattern. We are in regular conversations with doctors at US hospitals to follow the local infection and death trends. US and European governments are in the process of launching unprecedented monetary and fiscal stimulus to blunt the impact and hasten a rebound. The economy will likely worsen, and then it will recover. But we don’t know the details.
This very uncertainty is causing investors in many cases to price businesses as if there will be no return to normal economic conditions. But recall: The value of a business is the present value of all future cash flows—not just those over the next few months. It’s a simple analytical point but a foundational one. We are being disciplined and doing what we always do: focusing on understanding our businesses, examining balance sheets and buying good businesses at what we believe to be cheap prices. We have been relentlessly gathering information and reading as many companies’ earnings reports as we can to learn what other executives are seeing. We are also stress-testing our basic assumptions to understand a business’s ability to survive this crisis (balance-sheet strength) and its earnings power coming out on the other side (business quality). In many cases, we are finding significant dislocations between price and value. We are not saying today is the bottom—it can always get worse, and price can always dislocate further from value—but that doesn’t mean there isn’t already a large gap between price and value today.
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