Where Do We Begin?

Where Do We Begin?

by David Atwood

Where do we begin is first answered by acknowledging gratitude.  Clients who put their trust and confidence in us over the past 35 years gave us our reason for being.  We have experienced significant market events like this in 1987, 1990, 1999, 2002, 2008 and now 2020 with many smaller corrections along the way. Each new experience came as a surprise with unique doubts and concerns.  With each successful outcome we have become more resilient and the purpose of working together has become clearer.

The number of clients calling directly with concerns over the current market turmoil is a big fat zero, as of today’s closing. Our clients are demonstrating discipline and they are investing rather than speculating. Being in your service at a difficult time like this is an honor.

A key part of our role as advisors is to manage emotions. We all have them – the big ones usually surface around the people we care about more so than about money.  Thankfully everyone in my immediate circle seems to be healthy at this point in time. Let’s talk about you.  Covid-19, commonly known as the Coronavirus, has not likely made you sick at this moment.

If by chance you are sick or not feeling well, I sincerely hope you are feeling better soon. We do our best to promote wellness, especially among clients and their families. We ought to minimize suffering wherever we can, regardless of whether it makes us more resilient individually or collectively.

An alarmist will quickly note the sky is falling and point to our impending apocalyptic doom. Those considered erudite will proffer wisdom, predictions, and caution on how we can never be too safe. At the risk of sounding complacent or out of touch, let’s focus on the facts.

The World Health Organization, (WHO), is reporting 167, 515 cases of Covid-19, Coronavirus, globally in 150 countries.  More than 90 percent of the reported cases are in just four countries.  Two of those – China and the Republic of Korea – have significantly declining epidemics.  The recent declaration of a pandemic is an indication that there are technical and political reasons why we need to take the matter seriously.  The numbers of people getting sick will continue to rise as the pandemic spreads outside of China.  We can estimate that about half of us here in Canada are likely to be infected at some point.

Keeping Perspective

The outbreak appears to have reached its daily peak in China February 13, with 4,083 new cases and 254 deaths. The world is a big place, with billions of people. Containment inside of Wuhan, China among an increasingly mobile society is inherently difficult. After the peak in China, there were smaller outbreaks in South Korea, Italy, and Iran resulting in the number of new cases daily to climb by 3,000 and 100 deaths world-wide.  The spread of the virus is expected to peak globally sometime in the next 8 weeks.

The majority of Americans will experience one of the 200 strains of the common cold about 2-4 times per year.  The common cold (Rhinovirus) will be experienced by about the same number of people over the next year as Covid-19, however Covid-19 is about 10x more communicable.   The contagion of the Covid-19 virus is likely to slow down when the weather warms up because the virus is mainly concentrated in a band of 30-50 degrees north latitude, so it is likely seasonal.

Of those impacted, about 80% will be early-stage, 15% mid-stage and 5% critical stage.  Early stage symptoms are like the common cold and mid-stage symptoms are like the flue; these are stay at home for two weeks and rest.  5% will be critical and highly weighted towards the elderly.  The mortality rate on average will be about 2% of those infected, depending on local health care resources.  The rate of infection could overwhelm our health care systems with critical stage cases.  As a result, we are being asked to maintain social distancing, especially among the more vulnerable.

The number of unreported cases is much higher, due to people carrying the virus without displaying any symptoms. Many people carrying the virus will infect precisely no one. In many cases, insufficient testing capabilities are available to confirm a diagnosis.  Most of those reporting have since recovered and are clear to resume their normal daily routines. So far, the number of deaths is comparable to what we would experience during an average flu season.

The news media is working the pandemic story with all the attention it deserves and I would encourage you to read this article, Globe and Mail with a reference to the Incredible Shrinking Pandemic. Competitors in the oil business jockey for position as the economy begins to contract.  As the Russians and OPEC squabble and struggle to hold onto market share from American shale interests, the one-two punch of pandemic and falling oil prices is delivered to the economy.  The longest running bull market in history is now over and replaced with crazy indiscriminate selling.

What Does the Covid 19 Pandemic Mean for You and Your Money?

We begin with your investment plan.  We planned to ensure that your short-term cash flow needs will continue without interruption from a temporary turmoil in financial markets.   Your plan is long-term in nature, (5-10 years or more), and it is likely that your long-term goals and objectives have not changed.  We don’t need to whistle and look the other way as we pass the graveyard, it’s too late to be on the side of the fence where we sell.   We’re on the other side of the fence where we stick to our plans and our long-term view.

As investors, we focus on the underlying assets that we own.  The underlying assets of our portfolios are businesses, unless there is a need for investment income or a unique short-term savings objective.   Each of the different mutual funds that you own hold about 25-35 businesses.  About half the money invested in each fund will go to about 15 of those businesses.  There could be some overlap in the businesses that you own because each different fund manager is choosing businesses independently from one another.

You don’t own an entire investment market or even a fraction of an entire market.  As value-oriented investors, the concept of indexing or owning the entire market is at best silly and at worst quite hazardous.  Warren Buffett has observed that, “in any sort of a contest – financial, mental or physical – it’s an enormous advantage to have opponents who have been taught that it’s useless to even try.”  We believe that over time value investors will outperform the market and that choosing to match it is both lazy and short sighted.

Professional fund management teams with highly skilled analysts offset concentration risk by spreading risk among non-corelated industry sectors. Our business exposures are further diversified geographically to spread risk among the economies of different countries and their respective currencies.

Before we consider the context of global stock markets, let’s drill deep on what we are doing as investors.

We Are Business Owners

With the assistance of experienced professionals, we approach share ownership as though we are fractional owners of an entire business. We are business owners, plain and simple. It feels different because we don’t make the daily operating decisions that a principle owner must make.  Some of those smart and hard-working business managers also get benefits that we don’t get, like a salary and stock options.  The number of shares that we own determines how we share in the benefit of ownership. As shareowners, we are in this together!

Similarly, when your portfolio goes down in value, our income drops proportionally.  We eat our own cooking too, so when your portfolio is going down, so does our personal portfolios.

Time horizons are important. Short-term objectives, say less than 3 years, require solutions with a fixed rate of return. Over the longer term, say 3-5 years or more, the free cash flow generated through the business operations will determine the intrinsic value of the businesses we own.  We could look at our business income as sort of an equity-bond, with higher confidence placed in those businesses with more certain cash flows, similar to a bond coupon.

Market participants act like a voting machine in the short term and a weighing machine over the longer term. Voting is done by auction, “mirror, mirror on the wall, who is the prettiest of them all?”  Motivated sellers vote that business ownership is ugly when facing the uncertainty of a pandemic.  When they can’t sell what they want, they sell what they can.  A short-term health consideration quickly results in a wave of panic and a complete loss of long-term focus.  As far as human behavior is concerned, this is predictable and so is the accompanying wave of emotions.

As the pandemic is brought under control, business operations will contract, normalize, then resume their previous trajectory. How long that takes will depend on the individual characteristics of each business. A business selling hand sanitizer or ventilators will rebound quickly while airlines or hotels will take longer to bounce back. Those individual operating characteristics are where our fund managers are focusing their attention.  The following chart gives some idea of what we might expect in the days ahead.

S&P 500 and Virus Outbreaks

5 most recent virus outbreaks highlighted on the S&P 500

When we experience a market event of this magnitude, there is panic selling with no regard for fundamentals. With other words, the selling is indiscriminate, without regard for the true intrinsic value of the underlying assets. The value of cash sitting in the operating account of a business may be worth more than the shares of the same business with no debt or outstanding liabilities.  In effect, the goodwill and operating value of the business may be given away for free.  The current opportunity is to invest with a dramatic reduction of risk.  We need to be greedy when others are fearful just as we were fearful when others were greedy.

The folly of mankind is in plain view as we close the chapter on the longest running bull market in history.  The recent past saw indiscriminate buying and selling, with little regard for the underlying assets or lack thereof.   During times like this, businesses are returned to their rightful owners.  We have favored a fundamental value-based approach with our portfolio construction. A rising tide lifts all boats, but not all boats will come back on the tide.  It is only when the tide goes out that you can tell who has been swimming naked.  The sun will shine again, green shoots will appear, and our businesses will return on the rising tide.

Please click the following link to see a chart showing the recovery that has followed similar declines in the past.

SP 500 Performance Following 15% Drawdown


In summary, we’ve been here before in similar scripts, with different actors. Those with cash on hand may take advantage of the opportunities. When investment markets bounce back, our carefully selected portfolios of heirloom quality businesses will float back, right side up, and life will go on. We have prepared for events like this.  Often times the best decision, is to simply ignore the noise, hunker down, stick to our knitting. The average lifespan of a bear market is 14 months.

With each new challenge facing humanity, there will be individual casualties and suffering.  We ought to remain compassionate to those less fortunate. The extra precaution we’re taking to protect our loved ones is worth the angst of a temporary drop in market value. Our lifestyle is not likely to change after a period of social isolation is over; we will carry on much the same as we always have.

The human capacity to thrive and survive is a result of the adaptive nature of our biology, including natural redundancy and our ability to think and behave appropriately. Our legacy goes beyond hundreds of thousands of years of human development.  We will survive this latest pandemic as we have many before it.

Changing circumstances will cause us to tweak the tool of capital markets to suit our needs.  The capital market system we are using has unleashed the capacity of mankind to prosper and become safer and more resilient than any other system before it.  We have the promise of global leaders to, “do whatever it takes”, to allow markets to function.   We all have to do our part including imagining a future that is brighter than our past.

Predicting how long the recovery will take serves no purpose other than to signal the personality of the prognosticator.  The probability of a successful recovery is as close to inevitable as it gets, in my humble opinion.

The sacrifices of the few will not be wasted. The whole of humanity will adjust by protecting against this and future biological shocks.  With hope, we will continue to come out a little bit more connected with each other, wiser and a little bit more resilient.

As always, should you have any pressing concerns or questions, please feel free to reach out.

All our very best,

David and Grant Atwood


Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated


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