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What Do We Do Now? Extrapolate

Legendary investor Howard Marks of Oaktree Capital wrote in his most recent memo titled Nobody Knows II (Nobody Knows I was written after the collapse of Lehman Brothers) the following:

"People may ask me for my opinion because they think I’m intelligent, think I’ve been a successful investor, or know I’ve lived through a lot of history.  But none of that should be confused with expertise on subjects of every kind.

And that leads me back to the coronavirus.  No one knows much about it, since this is its first appearance.  As Harvard epidemiologist Marc Lipsitch said on a podcast on the subject, there are (a) facts, (b) informed extrapolations from analogies to other viruses and (c) opinion or speculation.  The scientists are trying to make informed inferences.  Thus far, I don’t think there’s enough data regarding the coronavirus to enable them to turn those inferences into facts.  And anything a non-scientist says is highly likely to be a guess.

So, overall, there are facts, inferences and guesses.  It’s always essential to know which you’re dealing with."

The point about making informed extrapolations resonates. Looking back over the past decade, coming out of 2008, there have been many events, such as the one we are experiencing now with the coronavirus, which have caused equity prices to fall in the short run and for people’s resolve as equity investors to be tested. If you have fought through the urges to sell along the way, you have been rewarded – handsomely. The chart below titled Reasons to Sell from TheReformedBroker.com highlights all the events that could have caused someone to overreact in a moment of weakness. Furthermore, it illustrates a story that repeats itself time and again through the decades. As time progresses and we look back on each of these “end of the world, this time is different” scenarios, we realize it was just another blip on radar - however traumatic it may have felt at the time.



When we speak with our clients about ignoring the 24 hour news cycle, focusing on long term goals or Vision, or only making changes to their investment implementation when their goals have changed and not in reaction to the market, we do so not to provide a flippant response but because we want all of our clients to be successful on this path of creating and sustaining wealth.  

Just as the chart above shows how the S&P 500 consistently trends upward over the long term, the chart below from JP Morgan highlights the consistency in which the average investor under performs their own investments repeatedly. Our primary goal, from an investment standpoint, is for all our clients to be elevated above being average investors.



In order to be better than average, the first thing we need to do is stay the course. The financial plan is the tool we use to direct the investment implementation. If nothing changes from a goal standpoint, nothing should change from an implementation standpoint.  

Assuming the portfolio allocation is correct, we can use extreme market fluctuations to your advantage. Take for instance rebalancing (selling high and buying low). Currently bond prices are at record highs and we will be looking for opportunities to pare these positions and move the proceeds into stocks which now cost less than they did two weeks ago. We look for opportunities to sell holdings that are currently, temporarily, in a loss position to harvest the loss which can be used in the future to offset a gain - thereby reducing or eliminating the drag on portfolio performance over time due to income taxation. For those who are consistently saving, we look for opportunities to accelerate equity purchases now instead of waiting for stock prices to revert higher before buying.

The point of all of this is to say, as Howard suggests, nobody knows what tomorrow will hold or how events will unfold but what we do know is we enter these turbulent times from a position of economic strength; the market is higher today than it was a year ago and that trying to make informed extrapolations is a far better strategy than reacting to opinion or speculation. And now for some levity and perhaps perspective: when you read a headline stating 38% of Americans would not buy Corona beer because of coronavirus, something is amiss (that’s how you extrapolate).