The COVID Conundrum
To our clients and associates,
I don’t need to tell you that the first six months of 2020 saw the advent of the worst global public health crisis in a century. In response, the world locked down putting its economy into a kind of medically induced coma.
In this country, the immediate effects were (1) a profound and nearly instantaneous economic recession accompanied by record unemployment, and (2) the fastest, deepest collapse in stock prices in living memory, if not ever.
In response to this, I am writing this letter in two parts. The first is a statement of our general principles, especially those most relevant in the current crisis. This includes a restatement of how we practice our stewardship of your invested wealth. The second part is a review of what little can be known at this point, and how we propose that we deal with the uncertainties of the moment.
- We believe that all lastingly successful investing is essentially goal focused and strategically driven. All failed investing is market focused and event driven.
- Stated another way: every successful investor we’ve ever known acted continuously with a long-term strategy. Every failed investor we’ve known continually reacted to sudden and scary market shocks.
- Thus, we have observed that long-term investing success is only incidentally a function of the economy and the markets. Instead, it is a direct function of how the investor reacts – or more properly, how he/she refuses to react.
- You and we at Wooster Corthell are long-term, goal-focused equity investors acting on our strategy with patience and discipline. Perhaps one of the most important services we provide is helping you to not panic or over-react in stressful times like this.
- The equity markets are impossible to consistently forecast, much less be timed. The only certain way of capturing what has historically been equities’ superior long-term returns is to ride out their occasionally steep but historically temporary declines.
Review and Outlook
- At mid-year, the best that can be said is that the first great wave of the pandemic appears to be abating where social distancing and masks are still required. In the states that have reopened, the rate of hospitalizations has risen sharply especially among the younger generation. The interaction between the pandemic and the economy in the short to intermediate timeframe is therefore impossible to predict, as is the timing of the development and distribution of a vaccine.
- Our equity market crashed (is there any better word for this?) from an all-time record high on February 19 to a bear-market low (so far) on March 23, down 34% in just 33 days. There is no historical precedent for this steep of a decline in so little time. Amazingly – and equally surprising – it then posted its best 50 day rise in history! In spite of all this, the S&P 500 closed on June 30, 2020 with a respectable one-year return of 5.4%.
- Bonds of course provide only a false sense of safety. With interest rates essentially at 0% and bonds yielding only slightly more than this, transitioning a portfolio toward an asset class that historically has barely beaten inflation simply is not the way to build wealth over time. We believe that owning equity in the world’s greatest companies is still the way to grow a portfolio to provide for college or a comfortable and long retirement and especially a legacy for your children and grandchildren.
- It should also be noted that even if the pandemic eventually subsides and the economy recovers, in the near term, investors will still need to deal with what may be the most widespread civil unrest in our country in decades. There is also the expectation of a bitterly partisan presidential election cycle. The market fears uncertainty and we are obviously living in uncertain times as I write this.
- I have deliberately intended in this summary to convince you of the sheer unknowability of the short term (say, third quarter 2020) to intermediate term (say, through the end of first quarter 2021) economic and market outlook. I’ll repeat: you and we are long-term, goal-focused, patient, disciplined investors. Our focus is on history and what it tells us rather than on headlines and their distractions from our goals and dreams.
- Finally, I would urge you to think back to better times – just five short months ago. Have your most cherished lifetime financial goals changed since then? If not, I see no compelling reason to change your plans – and no reason at all to change your portfolio.
- To me, optimism tempered with the realities of the world we live in is the only way to enjoy the journey we are all on.
By all means, please be in touch with us with any and all questions and concerns.
In the meantime, I want to personally thank you. Thank you for trusting us to guide you into the future and trusting us with what is, for many of you, the responsibility of managing your lifetime savings. It is truly our privilege to serve you.
Past performance is not indicative of future performance. Loss of principal and/or loss of portfolio value are possible.