30 April 2020

 

I have the conviction that financial markets are ruled by the same laws that dominate the physical world. One law which I particularly appreciate is the one regarding Cycles. Like the seasons or tides, cycles also dominate the financial markets.

 

Markets are, in my opinion, rarely balanced. More often the pendulum is on the optimist side rather than the pessimist side. In late march, the market participants were showing great fear and concern regarding the strength of many companies. Today, it seems to me that this fear and concern has vanished.

 

My time in this career has showed me that in the long term, the health of businesses are not necessarily correlated to the health of the economy. Unsurprisingly, in the short run this relation does exist. I often repeat that no one can predict the market in the short or medium term. This being said, it is my duty as investment manager to know where we stand in the in the current market cycle.

 

My reading of the situation is that the world has come to an abrupt stop. Unemployment has skyrocketed and international consumption has been obliterated. It is reasonable to think that the current event will have a lasting effect on our behavior. When’s the next time that we will rent an Airbnb? Or how many people will wait hours in line for a 2000$ iphone? It goes without saying, that some companies will profit from those new changes, and thus we should not throw the baby with the water.

 

Markets today have reach their levels seen this past October. Back then my vision was that optimism and a low margin of safety was imbedded in the price of those businesses. I can easily make the case that the margin of safety has not improved.

 

In our last virtual 5-7, Alex and I discussed the recent price plunge of oil. We talked about the prices going into negative territory and he wondered if there was a way to take profit from that. I reminded him of John Menard Keynes who suffered important loss in the markets. He once said “The Market can stay irrational longer than you can be solvent”. Today again I belive it is not a time to fight the market but to be patient and look over the horizon. 

 

Elie