How do we navigate this unprecedented market environment? While the circumstances of the Coronavirus/Oil War are extraordinary we are in the midst of a major crisis. Simply put, in a crisis there are certain actions we must adhere to as long-term investors until this crisis passes. We use historical precedents as a guideline, but every crisis is different. What isn’t different is how we approach them. This is not a time to be frequently trading long term positions locking in losses under irrational circumstances. Once the virus hysteria passes, events and gatherings return to normal, and fiscal stimulus is launched by the government the market will stabilize. The stock market rewards investors who are long term oriented. While others are selling their shares out of panic, it creates an opportunity for those who want to buy a stake in those companies with the mindset of a long-term part-owner. Stocks of great companies are selling off because the market is predicting that their earnings will be punished at least for this year, but their long-term business prospects remain the same. This is where mispricing occurs in the market. We do not know if this virus outbreak will worsen or accelerate before it subsides, but we do know it will subside.
It’s easy to be a long-term investor when the market is ratcheting higher with very little volatility which has been the case over the last few years (excluding December 2018). The difficult part comes when the markets begin to sell off for a public panic such as a virus outbreak. We are investors, not traders. We buy stakes in good companies, pay a reasonable price for our stake in said companies, and then let those businesses operate and compound our capital over time. This might seem simple but it’s important to understand what drives returns and why this is the most effective strategy for long term investors.
Equities are one of the best long-term investment vehicles, because they are the only asset class that continuously re-invests a portion of your capital. When you buy real estate or commodities such as gold and silver your capital is not automatically reinvested (assuming its value appreciates, or you earn rent, royalties, etc.). But rather a new opportunity must manually be found. Historically, this can be difficult over long periods of time as the competition of capitalism works its magic. When you own a high-quality company, this capital is typically being reinvested by experienced management teams who have expertise in their field with a history of operating businesses at the highest level. This capital reinvestment creates a ‘compounding’ effect over time which is the way that wealth is created...