It's always interesting to see the avalanche of communication from money managers and advisors every time a sufficiently large number of investors suddenly decide they don’t like stocks. Natural, I suppose, but if the investor really understands how the manager invests, and if the client really understands the advisor's process, then what the manager or advisor will do during a major shock shouldn't really be in question. Major shocks may be infrequent, but they are inevitable. Preparation matters.
Complacency has been a feature of economic and financial markets in recent years. Businesses sought to optimize supply chains for lowest cost and got complacent about resilience. Investors sought to optimize returns by chasing stock prices higher and got complacent about resilience. Everyone forgets. Corporations forgot about the China and Hong Kong SARS outbreak of 2002-03, and the Japanese tsunami of 2011. Investors forgot about the US financial crisis of 2008. So here we are.
We have long emphasized preparation. It is a core part of our philosophy on business and investing. Severe problems may be infrequent, but they are absolutely part and parcel of owning and running a business. Rather than guess about what may or may not happen next - a difficult exercise at best - we prefer to plan and prepare. We prefer to be resilient. We prefer to be anti-fragile. We prefer to be ready for whatever may come our way.
In recent years our emphasis on preparation has appeared silly, even antiquated. But the families we work with understand the value of preparation. They know that the world is not always as it seems. Being prepared allows them to act in a rational and intelligent manner at critical times, while others submit to fear and panic.
The simplest way to be resilient is to hold material amounts of cash and reserves. Some see these assets as "a drag on returns" when investing appears easy. But such assets provide ballast and can also serve as dry powder for new - lower priced - opportunities. Consider Berkshire Hathaway with $500B market cap and cash and equivalents on the balance sheet exceeding 25% of that figure: good collection of businesses; capable management; history of doing sensible things with cash; potentially in a wonderful position to pounce if the sell-off deepens. The numbers may be smaller, but that, in a nutshell, describes what we want to help create for every one of our families.
As for COVID-19, it's clear that most governments around the world are not well prepared for a pandemic. Of course, that has not stopped anyone from engaging in extensive narrative control, whether it be the CCP in China or the CDC and local health authorities in the US. Unfortunately, doctors and nurses are bearing the brunt of political expediency. From a financial perspective, we are going to see some big earnings potholes for several quarters and perhaps recession. In any case, there are bigger economic problems coming down the pike - perhaps we have an opportunity to begin preparing for those now.
Resilient and anti-fragile and opportunistic. That's who we aspire to be.