When we encounter crises like the current one induced by Covid-19, we all look for past reference points as they provide strong guidance as to what may or may not occur. This crisis is unprecedented in many ways and no single past event will allow us to predict what lies ahead. However, when it comes to market timing, we think that the above graph of the Dow Jones index during the 1929-1932 bear market, is humbling and a stark reminder that first looks/rallies may be deceiving. This is not to say that history will repeat itself, but merely to point out that timing the market, has more to do with trading than investing and can be a dangerous game.
Time, not timing is what matters, and knowing when to invest isn’t as important as how long you stay invested.
Being a Wealth Manager should be a lot more about the management of uncertainty and risk than a prediction exercise. Asset protection and risk management are the core of what we do. But, as crises like the one we are experiencing develop, they unveil their fair share of crystal ball readers. I have been somewhat stunned by my LinkedIn feed, including featured posts by large financial institutions, titled “Should you buy the dip?”, “10 reasons it’s a great moment to buy stocks”, and the likes. While they make for great headlines, these experts’ guess is just as good as yours… or ours!
So instead of chiming in and adding another (probably average) guess to the daily lengthening list of experts’ predictions, we choose to focus on facts, and on identifying the known and the unknowns from an economical and financial markets’ standpoint.
What we know
When it comes to investing, hard facts allow us to manage risk and uncertainty, without falling into the trap of making predictions with so many variables. While it seems clear that no one is in a position today to ascertain where the next few months will take our lives and economies, trying to time the market should also be avoided.
At i-Cthru, we always stress that cash is an option to buy at lower levels and that investing is a long-term exercise.
1. A Unique Crisis
Covid-19 is a previously unthinkable hit. In a few months, it has led to a near-total shutdown of social and economic activity in all corners of the world. The most recent data indicates that the level of global GDP may have dropped a little over 20%. The corporate losses have caused a domino effect and leaders in every industry are moving urgently to protect employees and build resilience as companies try to survive the global shutdown. Not only is the size of the hit unprecedented, but so is its nature. As much as the 2007 crisis was triggered by a structural problem, like so many other crises before that, going into this Covid-19-induced recession, the world economy was healthy. This economic crisis is exogenous in that it was triggered by a health crisis.
2. Knock-on effects
Like Ray Dalio from Bridgewater points out in one of his most recent papers, “the ripple from the shock is unavoidable, so recovery will be difficult. […] Unless an economic contraction is very brief (allowing spenders to “see through” it), there are knock-on effects that come from a pullback in spending. Some businesses close forever; incomes fall, leading to less spending; and high unemployment and uncertainty lead to higher savings rates and even less spending. Then, once demand begins to recover, hiring tends to lag as a result of businesses finding more efficient ways to meet demand. Fiscal policy can help to offset some of the recession impacts, but it would take a much more aggressive response than we’ve seen so far to offset them fully”.
3. Government response
Central banks and governments around the world agree that the situation is grave and have rolled out extensive financial packages to manage the economic fallout and support individuals, businesses and large corporations. The crisis will of course have a very high cost, but governments around the world have been swift in their initial reaction to limit the immediate effects as well as reactions-in-chain, and allow the economies to recover, once it becomes an option. It is this massive increase in liquidity which has fueled the recent market recovery. While the economy matters tremendously, one cannot overlook the impact of liquidity.
What we don't know
1. How to reopen our lives and economies
As thoroughly explained in this recent BCG study, “restarting economies and life will be the defining government challenge of our time. Governments must find an appropriate middle ground between a long, broad lockdown that damages the economy and a reopening that is too soon and too fast, risking public health and potentially subsequent lockdowns. But this is uncharted territory. With no modern precedent to inform them, governments must create the maps that will guide their actions over the next critical months”.
2. A very large range of possible outcomes
Nobody knows yet the real economic and stock market consequences of this crisis, simply because of the sheer number of possible virus development scenarios. Each scenario could lead to very different conclusions (recoveries shaped as V, U, W, L, etc.). The number of variables is simply too high (duration of the health crisis, death rate, possible mutation, possible disappearance of the virus, vaccine, treatment, government responses, etc). At i-Cthru, we do not fool ourselves or our clients into believing we know more than we do.
Where does it take us
When it comes to investing, hard facts allow us to manage risk and uncertainty, without falling into the trap of making predictions with so many variables. While it seems clear that no one is in a position today to ascertain where the next few months will take our lives and economies, trying to time the market should also be avoided.
At i-Cthru, we always stress that cash is an option to buy at lower levels and that investing is a long-term exercise.
1. Qualitative investing as long-term business owners
Today, we remain invested in our high-conviction qualitative ideas where we view ourselves as long-term business owners. When it comes to selecting investment ideas, we adhere to Warren Buffet’s idea that “It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.” In other words, we focus on investing in the right companies, in which we see great intrinsic potential (as opposed to investing in undervalued stocks). With this in mind, we’ve taken the opportunity to increase some of our positions, at lower price points, dollar averaging our purchasing price, and remain focused on the next 5 to 10 years, where we see significant opportunities.
If we buy the business as a business and not as a stock speculation, then it becomes personal. I want it to be personal.
- DocuSign: one of our qualitative investments is DocuSign, a Software as a Service (SaaS) company in which we invested shortly after it went public. It is part of our workflow automation investment theme, which is close to our heart, as a fast-growing under-penetrated market, allowing companies to improve efficiency through streamlining. This crisis might also represent an opportunity for businesses like DocuSign, as companies attempt to automate their processes even further, cut costs, and are forced to enable working from home.
- China: We also remain invested in select companies across various industries in China, which will be great vectors to participate in the Chinese transition from an export production-based economy to a consumer-based one. Of course, investing in China is controversial to some extent, but like Ray Dalio, we agree that it represents an opportunity. In a LinkedIn post titled “The big cycles over the last 500 years” published on May 21st (an enlightening long read if your interest is peaked), Dalio pushes this investment theory further, explaining why he thinks the China economy will soon surpass the US. In his post, he brings to light that the world has seen a few economic superpowers over the last five centuries and points out that none of these countries were able to hold on to their leading position indefinitely.
2. Quantitative Investing to avoid emotional biases
As for our quantitative strategy, it’s doing what it does best, filtering out emotional biases, and staying on the sidelines until it identifies a fairly priced opportunity with a satisfying risk profile. Our quantitative investment strategy, which is grounded in fundamentals, was designed to protect assets first and offer long-term capital appreciation second. While past results as well as backtesting, should always be taken with a grain of salt, our backtesting including through the last crisis of 2007, showed very encouraging results validating our investment model.
The bottom line is that more so than ever we remain focused on the long-term and on managing risk for our clients and ourselves. Time, not timing is what matters, and knowing when to invest isn’t as important as how long you stay invested.
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