“When the Time Comes to Buy, You Won’t Want To” (Doug Kass)

Quarterly Letter

It only took a little virus to put an end to the “flawless decade long” bull market. Then, we realized how connected the whole world is thanks to the globalization of trade, communications and transport. Countries started imposing travel restrictions, lockdowns to contain the spreading of the disease.

 

WHAT DO WE KNOW?

Regarding the status surrounding the virus, we would spare you our opinion. Since we are non-scientists, anything we have to say is likely to be a guess. However, the economic impact is likely to be quite serious:

  • Unemployment will skyrocket in the short term because of confinement regulations;
  • There will be a recovery but it could and will likely take longer than everyone hopes. Since it is predicated on people returning to their normal life, it would be much more gradual because of the perceived safety of social distancing. It will also likely be uneven since different industries are affected to a different degree: we doubt sport fans will rush back to sport arenas as though nothing has happened;
  • Until we have a vaccine that provides immunity (probably in the next 12 to 18 months), life will unlikely revert to the normalcy of the pre-COVID 19;
  • As new anti-viral drugs become available, fear will subside but caution will remain with us until the availability of a full immunity vaccine.

WHAT DOES IT MEAN FOR INVESTING?

Most of what you read and hear today is merely opinions and guesswork. They are either optimistic or pessimistic because the author gets to choose to overweight or underweight the data available to justify his/her conclusion. We read somewhere last week that “These days, everyone has the same data regarding the present and the same ignorance regarding the future”. That is not very far from the truth. We do not believe we have superior knowledge regarding either the outlook for the virus, its impact on the economy or the direction of oil prices. However, we do hope we could offer some thoughts regarding how investors should behave in the current context.

  1. Nobody can tell whether this is the time to buy because nobody knows;
  2. “When the Time Comes to Buy, You Won’t Want To” (Doug Kass). This is possibly the truest statement we have found in our investing career of almost 4 decades. The best time to buy is generally when nobody wants it. The reasons that make a security so unwanted affect other people as much as they affect you. That is why it is so difficult to buy at the low. As most successful investors know, “All great investment begins in discomfort”;
  3. Investing in certainty is an oxymoron: if that were the case, everyone would be rich.

 

STRATEGIC REPOSITIONING

We believe that investing is not always about asset allocation between stocks and bonds, domestic and foreign, large cap and small cap or growth and value. The most important thing is to strike a balance between being aggressive and defensive according to the conditions of the environment. As you might have noticed over the last 50 days, the environment has changed a lot:

  • the risks of the environment are recognized;
  • future returns have become more attractive: high-yield bonds have reached 8 to 9% versus federal government bond yields close to 0%;
  • stock prices are down. Some sectors and stocks are down more than 50%;
  • investors are frozen. Financing has dried up.

Under these current circumstances, we believe it is the perfect time to become more aggressive and to reposition into the “essentials” and quality names at very deflated prices.

 

LOOKING FOR THE BOTTOM…

…would be a bad strategy because a bottom, by definition, can only be recognized after it has passed. Furthermore, we can only buy what we want when it is on sale (i.e. everybody wants out). After the bottom has passed, it also means there are no more sellers from whom you can buy and prices will likely move back up quickly.

As the old saying goes: “Perfect is the enemy of good”. An investor’s goal should be to make many good purchases, not just a few perfect ones. In life in general, we buy an asset when we believe the price to be attractive, not at the bottom…

GRADUAL REBALANCING

Our strategy over the next several months is obviously one of gradual adjustment and not one of all-ornothing. As we find undervalued securities, whether it is in equity or fixed income, we will add them to the portfolios and eliminate or reduce the ones we believe have less long-term potential.

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For clients who must withdraw from their RRIF, note the changes that were announced recently: On March 18, 2020, the federal government announced it would reduce mandatory RRIF withdrawal rates by 25% for 2020 as a response to the COVID-19 pandemic.

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Please do your best to be safe in these circumstances.

We are reflecting on all our blessings and how grateful we are to have you, our clients, and our wonderful staff who are hard at work each and every day, remotely, while taking care of their loved ones.

The Claret Team