Dear Clients and Friends,
I hope this letter finds you healthy in body and spirit. First, let me join many in expressing gratitude for the people who work in essential businesses who keep the food supply going, see to our health, ensure our power & water remains on, and respond to our emergencies, often with great risk to their own safety. The pay of many essential workers does not express their worth to society by a long shot. I see that as a market failure, that it can’t price their labor accurately. I don’t think the government would do a better job at price setting, but what about an essential worker tax credit or hazard pay premium? They are owed and must not be forgotten when things return to normal.
Given the pandemic, what changes should I make to my portfolio? For most of my clients the answer is “probably not that many.” Your portfolio should always take into account the possibility that something bad and unexpected will happen. Markets often price in risks they see, but never risks they don’t see. That is the job of the investor. And like diet and exercise, the advice is simple: diversify, don’t take on more risk than you can stomach, match your near term spending needs with low risk/liquid assets and only your long term investment goals with riskier assets. Of course, when a black swan event does happen – it makes sense to reassess your views of the future and tweak your portfolio for a changed reality and a future black swan.
Thinking about what the world will look like post-coronavirus, I oscillate between Dean Martin who sang “the world is still the same you will never change it” and an even older character, Greek philosopher Heraclitus (I google this stuff) who coined the phrase “the only constant is change.” I believe both to be true and I do not see an inherent conflict: human nature is mostly a constant, enlightenment is gradual, yet our daily lives change with technology.
What does that have to do with managing money, which is the topic I am supposed to weigh in on? We tend to think of the future after a seismic event as either a return to normal, or to something entirely different. But perhaps the truth is somewhere in the middle: some things change, some do not. As an investor you cannot afford not to think about the future, because you are buying/holding assets now with the expectation that they will generate income or appreciation for you in the years ahead.
So here is my brief take on what the future may hold. To be sure, the future is not predictable by me or anyone else, but thinking about the range of possibilities is a helpful exercise, knowing that one cannot invest in the past:
Real Estate: I am torn between whether we will return to normal or see seismic change. Working from home – “WFH” – has been around for a while, but we have never been forced to work from home en masse. When this is all done, do we just go back to those office buildings and sit in close proximity to each other? It is possible, but to me it seems equally possible that there is no going back and that WFH is here to stay. If that turns out to be true, that does not bode well for commercial property. It would also change where we might want to live. Do the urban hinterlands become more attractive once you no longer have to commute every day or even ever?
(Offline) Entertainment: OK, hard one. I would say investing in this sector definitely falls in the speculative category. I think (some) airlines, hotels, and strong entertainment brands like Disney will recover. The travel genie is out of the bottle for large swaths of the global population and I don’t think it is going back in. When it comes to cruise lines, however, I am not so sure. Has everyone now come around to the view that they are floating petri dishes? A colleague reminded me that dedicated cruisers are just that: dedicated. So perhaps I will be proven wrong. Concerts, restaurants, movie theaters: too speculative for my investment dollars. Their demise is certainly a loss, as they enrich our lives broadly, not to mention all those hard working people that will be affected, but I am not optimistic.
The Bare Necessities: Consumer staple companies are in the sweet spot. Who would have thought that toilet paper, hand sanitizer, face masks, dry goods and the grocery stores that sell them would become a coveted investment destination? I think it makes sense to own these companies at the right price.
Popular Stocks: I think the market is by and large getting these right: Netflix, big tech, Amazon, pharma/biotech. The issue is that everyone is piling into them. Popular stocks by definition exhibit momentum. When they disappoint, the price declines can be steep. It’s good to remember that successful investing is just not as easy as buying what everybody else is buying, even if it can carry you upward for a while.
Silver Linings. The most important silver lining is of course the drop in new cases and the progress towards treatments and a potential vaccine. But there are other silver linings. The planet and the animal kingdom are doing better. It is not a trade off that we chose, nor should contemplate, but be that as it may, it is nice to see urban wildlife make a comeback globally, coyotes and black bears casually roaming Yosemite Valley, and blue skies over the big cities. 2020 might turn out to be the first year where we see a drop in carbon emissions. Renewable energy stocks have held up much better than their fossil fuel counterparts and are not going out of style just because oil is cheap. I see this as a time to recommit to investing in a lower carbon economy and I hope that government infrastructure spending to boost the economy will take the long view and build the energy infrastructure of tomorrow.
Let me sign off on that positive note. The fabulous spring weather is calling me, to be enjoyed in a responsible, socially distanced manner. May springtime bring renewal for us all.
Jan Schalkwijk, CFA
JPS Global Investments
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