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March 28, 2020, 9:36 a.m. EDT

This stock market is full of drunken sailors, and you want to buy what they’re foolishly selling

Coronavirus crash is a buying opportunity for focused, long-term investors

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By Vitaliy Katsenelson


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The coronavirus is taking a terrible toll on human life and the global economy, but for stock investors, this crisis is an opportunity to increase the long-term return of your portfolio. Just as greed leads to more greed during a bull market, fear feeds on itself and leads to more fear. It is hard not to panic when the store shelves are empty and you’re hunkered down in your home.

Our firms has spent a lot of time researching coronavirus and COVID-19, and now, with confidence, we can tell you that we don’t know how this will play out. Nobody does. The virus may get contained relatively quickly, as has happened in both China and South Korea. Social distancing and lots of hand washing are key to slowing the spread of the virus.

My biggest hope is that capitalism will win — that pharmaceutical companies will find a cure or a vaccine for COVID-19. I’d bet on capitalism — our selfish perpetual engine with the power to do seemingly impossible things. Or the virus may get killed by sunlight and warmer weather — something that happens every year with the common flu.

The realist in me believes COVID-19 may linger longer than a few months (especially after seeing the damaging and embarrassing U.S. response to date). How much longer? We don’t know. From today’s perch a global recession looks unavoidable; in fact we are most likely already in recession. At my firm, we’re positioning our portfolio and our strategy as if the virus is here to stay for a considerable time.

We had not been positioning our portfolio for a virus but for a recession; and since this virus will cause a recession, we find ourselves owning a lot of recession-proof “anti-viral” stocks (a lot of them are in healthcare). Also, we have plenty of cash and hedges (where we are allowed).

“Life can only be understood backwards, but it must be lived forwards,” the Danish philosopher Søren Kierkegaard observed. To that point, I was discussing the Great Recession with a client, and he was reminiscing about how it would have been nice to buy stocks in March 2009. I spent a lot of time thinking about that lately, and here is the reality of it: It is only “nice” from today’s rear-view mirror perspective.

If you bought stocks six months, a month, and or even a day before March 9, 2009, Mr. Market would have schooled you: “Don’t buy, just sell.” Just as during bull markets every sell decision stirs subsequent regret, and every buy decision brings instant confirmation of your brilliance.

The lessons Mr. Market teaches during one of his manic-depressive moods are usually the wrong lessons — opposite from what you should be learning. It is now clear as rain that you should have pawned your treasures and bought the market in March 2009, but it sure as heck wasn’t clear then. If you turned on your TV or read the newspaper back then, every single headline raised your blood pressure. The news was depressing — even worse than it had been six months before.

I promise you that at some point in the future we’ll know that on this or that day we should have gone all in on stocks in response to the coronavirus, but we are not ensconced in the future, and we don’t have that luxury.

You can have clarity, or you can have undervaluation; you cannot have both.

There is a saying on Wall Street: “They don’t ring a bell at the bottom.” They really don’t. So today we have to drive with a foggy windshield and just continue doing what we have done all along — buying high-quality, significantly undervalued businesses. Here is what we know: You can have clarity, or you can have undervaluation; you cannot have both. Nowadays investors have anything but clarity, but undervaluation is coming real fast.

Why not go to cash now and just buy lower? Today our firm owns a lot of 25- to 50-cent dollars (we sold 85- to 90-cent dollars a few weeks ago). We could sell them and hope to have a chance to pick them up for 15 or 20 cents on the dollar. But we may not get that opportunity, and quite frankly we like the businesses we own.

A client asked, why not wait until things settle down, when this irrationality has stopped? My response was, would you rather play poker against professional poker players or drunken sailors? “Drunken sailors, of course!” he retorted. When fear rages, time horizons are squeezed to nothing, and portfolios are liquidated because people were overleveraged to the hilt, the market is awash with drunken sailors. This is when you want to invest. You have to accept that every (buy) decision you make will look “wrong” the very next day, but that is par for the course.

Our coronavirus investing rules

1. Maintaining a long-term time horizon is paramount:  Every investment decision we make is from the perspective not of tomorrow but three- to five years from now.

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