So we’ve wrapped up another year – not a good one for most investors. Stocks, as measured by the S&P 500, dropped 19%. The tech-heavy Nasdaq performed even worse, sagging 28%. Bonds – the traditional safe haven – didn’t do much better. The safest of the safe – U.S. Government 10-year bonds – fell 16%.
However, a challenging year like this one offers opportunities in the future. One would be wise to look at the past to give us some guidance about what the future may hold. In the case of bear markets, defined as a drop of more than 20%, the subsequent years’ markets tend to perform very well. Future opportunities are born of the uncertainty of the present.
Is there a bottom to this fall?
I understand how frustrating it can be to see one’s account decline and stagnate. There can seem to be no end to it. However, familiarizing yourself with history is greatly helpful. For example, since 1957 the median market return is positive for 3 months, 6 months, and 1 year after a 20% fall. We’ve had 12 bear markets since 1957 as measured by a fall of at least 20%. 8 of these 10 yielded positive returns a year later with a median return of 23.9%. If you extend this research to stocks that were cheap (a cohort we specialize in) the median return balloons to over 30%.
Many of our investors have experienced similar times in the past. The years 2008-2009 were the most frightening of my investing life. Lehman had failed, and the U.S. banking system was in crisis. Many investors cashed out, never to return. To our clients’ credit, our phone lines were silent. The one call I did receive was from my oldest client, an individual who had confidence in me from day one…
Perspective for When Things Look Bad
His original $75,000 investment had doubled, but since the financial crisis, he had given back most of his gains. He was down over 50% and wanted to know “if we should do something.” I told him that he owned excellent assets. The act of selling now would be to transfer those great assets into stronger hands. I said he should be the one with strong hands, and if he really wanted to sell those great assets he should wait for a better price.
Of course, stocks should always be seen as assets or more specifically as pieces of a business. Most stocks are average, some are terrible, but some are truly great. The market, or how most people view it, is something totally different.
The stock market in essence is really just an auction place. An eBay for stocks and other securities if you will. The price on your account statement is merely an offer price at a given point in time. You can accept it or ignore it and wait for a better price. I myself have zero emotion tied to that auction price. The fact that it has gone up or down in value doesn’t tell me anything or instruct me to act. It’s merely a point in history. On most days I’m not interested in the price, at all. In fact, if it’s too low I’m more likely to buy more not sell the shares I have.
My client didn’t move his money that day. In fact, he didn’t touch it for another decade. Over the next couple of years, he recovered all his “temporary” losses. After that, his account would double, and then by the time of his death 12 years later nearly double again. He wasn’t interested in any of the prices the market was offering.
CSH’s Top 10 Stocks are Great Values
I can’t peer into the looking glass and tell you what the market will do over the next year, but I do know that our top 10 stocks are great values today. And it’s not 2008 today. The U.S. banking system is the strongest it’s been in my lifetime, and unemployment is at historic lows. These factors should help mitigate the possibility and the effects of a recession.
The fact that growth rates for Amazon are down for the first time in a decade shouldn’t cut the value of their business in half. I mean that’s what a recession is, isn’t it? A period of negative growth. One would expect growth to stagnate or even fall for even the best businesses. But Amazon’s stock price has been pummeled as a result.
Additionally, the fact that consumer sentiment is at multiyear lows shouldn’t be a cause for concern. This indicator last fell to today’s level during the same period as I mentioned earlier in 2008. I feel the consumer confidence index could fall even further from here but it’s worth noting that according to JP Morgan, the average 12-month return of the S&P 500 after the last 8 consumer confidence troughs is 24.9%.
Finally, and maybe more to the point, the stocks we own for our clients are quite inexpensive. Some are at multi-decade lows. I’m almost hesitant to share our research as it looks like pie in the sky. Our intrinsic value calculations are well more than double some of today’s “auction” prices.
Staying the Course
Looking back to 1998, the weeks following September 11, and the banking crisis of 2008-2009 (when many thought our financial system would collapse), today’s situation pales in comparison to those events. Likewise in 2020 when the coronavirus nearly drove our economy off the cliff. In all cases, staying the course was the right move and I see no reason this time should be any different. In my next missive, we will cover some of our positions in greater detail.
So, here’s the plan:
- Prepare and plan for more possible short-term pain.
- Remember that asset bubbles take a while to pop and correct.
- Long-term investors in high-quality stocks such as Meta, Google, Berkshire, and Amazon should be very excited about the future. Valuations are at decade lows, some of these stocks would have to double to get back to fair values.
My largest positions today are Berkshire Hathaway, Paramount Global, Madison Square Garden Entertainment, Occidental Petroleum warrants, and Sprott Resources.