What A Year 2020 Has Been. It has been a year full of bad news. It started off with bush fires raging across the world. From Australia to Brazil to California. There was trade escalations between the US and China. And who could forget the rising tensions in Iran which could have led toWW3. To think all that occurred just in the first month is crazy. If there was anything that was going to top that for the rest of the year, it had to be spectacular.
Yet when we remember 2020, we will hardly remember the above mentioned things. For it will be remember as the year of the great pandemic.
From a handful of COVID-19 cases in Wuhan at the back end of last year to the enforced lockdown of the majority of the world’s population in the first half of this, 2020 has truly witnessed a staggering turn of events. Even if the outcomes now feel somewhat familiar, this period of adaption for individuals, economies and businesses has been swift and, in many cases, brutal. What began as a healthcare crisis is unavoidably morphing into a broader phenomenon as the second and third order effects build and extend beyond the immediate. The ramifications of this will be felt for many years to come and will touch on many aspects of life from politics through to business and from education to lasting societal and workplace change.
The lockdowns which were imposed globally in March lead to total economic collapse. The UK faced its largest economic contraction ever. The US faced record levels of unemployment. And the vast majority of countries around the world faced record budget deficits.
If someone had given you all these facts are the beginning of the year, you would have probably sold all your assets and run for the hills. But as we sit here in our home offices, global stock markets are higher today than at the beginning of the year. The MSCI World Index is up 16% YTD. The US-NASDAQ market is up a crazy 40% YTD. Investing is hard!
Market time being impossible is an adage I constantly reiterate on this site. As Terry Smith likes to say “There are only two types of people when it comes to market timing: (1) People who cannot do it , (2) People who have not realized that they cannot do it.”
I remember back in March, at the beginning of the panic, many investors were selling with the hope of buying cheaper later in the year. At the height of the panic, there was so much fear in the streets and investors were screaming to shut down the stock market! Those that panicked and sold lost. Whilst those that held their nerve and bought won out.
Stocks were never to hit the lows of March during the year again. Unprecedent levels of fiscal and monetary stimulus ensured so. With $18 trillion of bonds worldwide offering negative yields due to the vast amount of cash swilling around markets, stocks have become the only game in town. And who can forget the Robinhood traders; boredom and increased disposable cash lead to some trading the stock market for the first time
Yes there were reasons some sectors and industries saw share prices rise dramatically. There has been an acceleration towards digital – surging e-commerce orders, the rapid shift to digital forms for delivering healthcare, education and entertainment etc. Yet today, when looking at global markets, we need to tread carefully. Many stocks have been pumped to obscene levels. The dreaded b word has been floating around. Not Brexit for once but ‘Bubble’. There is good reason for this. Many tech and so called ‘safe stocks’ are being valued on multiples of sales. How investors earns decent returns from companies trading at 30x, 50x and100x sales I will never know. Have a read of the excellent blog post by Chariot Investing for more on this.
Saying that, there are pockets of value out there. The UK market, as I have been reiterating for a while now is cheap. The UK market is actually down 15% for the year and I believe stocks such as Unilever, RB, Relx, Burberry and Intertek would be valued much higher if they were listed on a foreign exchange. But I’m not complaining though. With UK markets being in the dumps, it provides me with an opportune moment to load of on these high quality businesses.
If 2020 has taught me anything, it is to hold high quality businesses. These businesses truly shine during recessions. I did not have to worry about my holdings in Alphabet, Paypal, Pepsi, Visa or any of the stocks appearing in my buy and hold list this year. I knew that regardless of the macroeconomic situation, these business would carry on making money. That is why I call them magic long term stock.
It is the lower quality businesses that truly provide the headaches. Companies like G4S were dropping like a stone during the panic. It was only due to a takeover bid that the price began to rise and I recouped my money.
Don’t be afraid of paying a slight premium for high quality companies. If a low quality stocks is trading at a P/E of 10 and a high quality one is double that at 20, I would go for the high quality one everyday of the week even though it is perceived to be more expensive. High quality wins out every time. Look out for companies that have a market-leading competitive position, an asset-light business model, a strong balance sheet, a recurring revenue stream and a high and growing free cash flow yield.
Another important lesson learned this year is the importance of holding cash. Ray Dalio says cash is trash, which is true over the long term. Fiat currency, which can be created out of thin air, will always loose its purchasing power over the long term.
However, in the short term holding a bit of cash can be useful in a crash as it gives you the dry powder necessary to pick up bargains. It won’t go down in value, therefore protecting your portfolio from further losses. Cash can also be employed to buy great stocks at decent prices as I have been doing this year.
The current climate with stocks rising by the day may indeed feel like crash is trash but here is an excerpt from the 1997 memo by the brilliant Howard Marks:
“We have been privileged to read a recent letter from Julian Robertson to his investors. In it, Robertson compares today’s fund managers to the Phoenician sea captains of thousands of years ago who were paid a percentage of the value of the goods they transported and thus were incentivized to design boats which emphasized speed over safety. This worked as long as the weather was good, but the storms that eventually came consigned the less safe ships to the bottom of the sea. He goes on as follows:
The last several years have been a great period for the audacious captains with their fleets of fair-weather ships. There has not been a storm for years; perhaps climatic conditions have changed and there will never be another storm. In this scenario the audacious crew with its fleet of swift but flimsy ships is the cargo carrier of choice.
This metaphor suits Oaktree exactly; we couldn’t say it better. Being prepared for stormy weather, even if it could cost us some of the easy money in good times, is certainly the course for us.”
Apart from the above two investing lessons, 2020 will certainly be a year to remember with many life lessons to be taken from it. Being brought closer to family. Appreciating friends and colleagues. Being thankful for personal freedoms. The incredible fighting spirit and ingenuity we humans possess. The ability to remain calm in the face of chaos. Appreciating ones time. Appreciating nature. Being able to pursue hobbies and interest once not imaginable. Simulating what Early Retirement would feel like. Practicing being FIREd. Even though 2020 will be remembered in history for all the wrong reasons, we should look back at it for all the good things that came out of it.