By David Baskin

I can’t count the number of clients who I have spoken to in the last month who have told me that they know, with something approaching certainty, that the “market” is going to go down, and probably by a lot. I understand their concern and to some extent I share it. But the big question is, what do we do about it? I made up this graphic illustration of the difficulty of market timing some years ago, and it has stood the test of time. It addresses the question: What are the odds that you will sell out of stocks at the right time, and then, buy back in at the right time? As you can see, we would all like to be in the green quadrant in the upper right, where we sell just before the market plunges, and buy back on the day it bottoms. We would also all like to win the lottery, live in good health to 120 and see peace on earth.

Sadly, the odds are against anyone trying to time the market. Those who sell right pay capital gains taxes and very frequently wait too long to get back in. We saw this with many people (not our clients of course) following the great financial crisis of 2008/09. Many wait too long to sell and get out of the market near or at the bottom. Veteran investors know to look for “capitulation day”, when the average investor has had enough, sells everything in disgust, and more often than not, finds the very bottom of the market.

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Markets go up and down, and sometimes quite violently. This was certainly in the case from mid-February to the end of May, and as we have noted in other essays, we saw unprecedented volatility. But the trend of the stock market is relentlessly upward, over weeks, months, years and decades. Even if we suffer in the short term, we know that over time, quality stocks always provide a return to patient investors.

Our equity portfolio is, in our view, very solid. The companies we own have managed their way through the initial stages of the COVID-19 pandemic. Some have suffered, but none have crumbled. We have eliminated the companies we feel face existential risk, have too much debt, or are in danger of cutting dividends. We cannot know what will happen with this horrible and persistent disease in the remainder of 2020, and indeed, in 2021 and beyond. However, we feel confident that returns will be better with the kind of companies we have put in our portfolios than will be the case with bonds or cash equivalent investments, with interest rates at record lows. Note that a ten-year government bond will return 5% to the buyer – that is cumulatively over 10 years. Many of our portfolio companies are paying dividends that exceed 5% per year.

We know that as human beings, our emotions frequently overwhelm us and cause us to take actions we later regret. There is no stimulus greater than fear, and psychologists have taught us that the fear of loss is up on the top of the list. Our job as professional investors is to ensure that we subdue our emotions and make rational, long-term oriented decisions.

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So, the answer to the question about markets going down and what do we do about it is simple. We do what we always do. We follow our robust investment methodology backed up by a sound decision-making culture. We do not throw out our decades of experience. And invest as well as we can with the best interests of our clients foremost in our minds.

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