Over the past three months, we have experienced a multitude of different emotions. We are currently fighting a health crisis which has caused a financial problem, and as of the end of April, the markets are down 10-13% year to date in North America. In this newsletter, I will explain our investment philosophy in a time of unknowns and outline our thoughts on the markets moving forward.
Investing During a Crisis:
I am an avid football fan. At an early age, I followed in my dad’s footsteps and started cheering for the Pittsburgh Steelers. If you know much about the Steelers during the 1990s and 2000s, you’ll know they were known for two key parts of their game: playing defense and running the football. I once asked my dad while watching a game, “why do they run the ball so much, why don’t they just throw it down the field and score a touchdown?” My dad explained that you run the ball to keep the defence on guard for a big play, and if you do not get the right opportunity to make a big play, you slowly but surely move that ball down the field. One of the biggest mistakes you can make is to try a long pass at an inopportune time, which leaves you open to an interception that can cost you the game.
This, in a nutshell, is the theory behind our portfolio management strategy over the past nine months. We are running the ball and playing defense. Midway through last year, we started the process of decreasing equity exposure for clients and using these funds to add to our defensive asset positions such as gold, government bonds and US dollars. Prior to the appearance of COVID-19, we had been telling clients to expect a downturn soon, however, we did not know what would be the triggering factor or exactly when it would happen. Despite this, we became defensive before the downturn occurred, which enabled us to preserve more capital for our clients that can then be put to work in these discounted markets.
Where Are We Going?
The markets have rebounded sharply since March 23rd, with the technology and health care sectors leading us up 30% from the low. Not all companies have participated in the recent rally. For example, travel, hospitality and energy companies, as well as preferred shares are still down 30-60% for the year. Canadian banks have also underperformed the TSX.
The questions we are fielding most often from prospective clients include the following: do we believe the worst is behind us, and when can we start buying stocks again? As we have discussed, we have never stopped buying quality companies we love, however we have been more selective. For example, we have been recommending the purchase of companies like Intact Financial, CP Rail, Waste Connections, ServiceNow, Google and Facebook during this time.
Over the past six weeks, upwards of 30 million Americans have applied for employment insurance and GDP has dropped -4.8. Consumer confidence is at its lowest in recent memory, and home and auto sales are at decade lows. We are still very cautious on the markets and have reiterated an underweight asset allocation to equities.
Even with a rebound, we are not close to being out of the woods yet. This is not the time to go all in. It is the time to slowly and steadily move the ball down the field and play good defense. Every investor is different, but overall, most are trying to achieve the same goal-namely, to preserve assets and watch them grow, and that is what I am here to help you do.
Sincerely, Kyle Sarai MBA