Market Update – March 19, 2020 


During times of crisis, we think it is important to remember what our expertise is and limit our opinions to what we know best. Nobody at Kingwest is an infectious disease specialist. Our opinion on the duration or the magnitude of the economic decline caused by the coronavirus will be no more accurate than your favoured news source.

Our expertise is in valuing businesses. We have the historical perspective of how stock market prices and long-term business values have diverged over time, sometimes radically. This is such a time.

Looking back over the last several decades, the stock market has endured some pretty grim news, and persevered and prospered. One only has to think back to the Russian bond default and the subsequent failure of Long Term Capital Management in 1998, which nearly brought the entire market to its knees. In 2000, the technology bubble burst followed by the terrorist attack on the World Trade Center. Then Enron collapsed in 2001. In 2008, we had the subprime credit crisis and nearly drove the country into a full scale depression. It is always something.

And yet for the last 25 year period through year end 2019, the MSCI World Index rose almost 500%, in a very lumpy pattern.

Over time, stock prices are quite volatile. People frequently overreact to dramatic and unexpected news. The underlying value of a business, however tends to be far more stable. We focus our attention on business value, and we seek to invest when the spread between price and value is wide, and participate as the business builds its value.

For instance, Mastercard says revenues may only grow to about $18.5 billion, rather than the $19.4 billion hoped for — a 3% trim and strong growth from $16.9 billion last year (sales fell 8% in 2008). Mastercard shares have fallen 38%.

We have substantial liquidity in our portfolios. We have not bought anything yet. There will be a bottom; we will not get it. But if we can reasonably invest in strong businesses after the peak of the hysteria passes, we will do very well. And pass it will.

Just look at what is happening in China. According to Goldman Sachs chief Asia Pacific economist, Andrew Tilton, daily indicators of economic activity, such as coal consumption, passenger volume, and property transactions, were about 70-80% below their 2019 levels immediately after the Lunar New Year. At the current rate of improvement of 5-10% per week, he estimates that China should regain normal levels of capacity utilization by sometime in April.

One’s ability to have a successful investment experience depends in large part on the willingness to “stay the course.” The ride can be bumpy, but you ultimately have to stay the course to have a chance of reaching your destination. Remember the lessons of the last 25 years. This time will be no different.

Thank you for investing with us, and for your continued confidence. Stay well.