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Finding Opportunities and Dealing with Extreme Uncertainty

Posted: Jared Jameson

There are only nine meals between mankind and anarchy.
– Alfred Henry Lewis 1906

This quotation seems to perfectly capture the fear generated by the Coronavirus. Obviously, there is also fear of mortality from the disease, but so few people currently have the disease it seems less of a concern. Shutdown my Starbucks, my movie theater, my favorite restaurant and I will soldier on, but close my grocery store and we have a problem. What else would explain the complete ransacking of some areas of the grocery store? We are all worried and so are politicians. As an aside, if the grocery stores do close, there will be someone, somewhere standing in front a huge pile of toilet paper with a big smile on their face.

This type of fear alone would hurt the economy and the stock market as plans for travel, purchases, etc. are deferred. But added to the governmental response of extreme social distancing and the resulting complete shutdown of several states and you have a true economic crisis. In addition, the length of time these measures will need to be in effect is unknown.

Stock and bond market performance reflect this new, uncertain reality. Market attempts to incorporate the ultimate impact of the virus are resulting in 5 to 10% daily movements in stocks and bonds within a general downward trend. In this WJNotes, we take a few steps back and discuss some investment precepts that are critical to remember in times of distress.

  • The biggest risk to achieving your long-term financial goals is not the performance of stocks and bonds, economic results or the impact of a novel virus. It is you and the decisions you make along the way. Making a couple of poorly timed decisions could doom your financial future. We are here to help you avoid those decisions.


  • Most investors and advisors are greedy when times are good and panic when times are bad. They also assume they will know when good turns to bad. The former creates more panic than necessary by exacerbating losses. The latter creates a false sense of security by reinforcing market timing as a response to extreme volatility. Combined they lead to the poorly timed decisions referenced above. At WJ, we would rather protect your portfolio during times of stress, as we have in this crisis, than capture every bit of upside.


  • Stocks drop 50% roughly once every ten years. Over the last 50 years a dollar invested in the US stock market is now worth $120.   Cash investments rarely go down. Over the last 50 years a dollar invested in cash is now worth $13 (about the same increase as inflation). Stocks have gone up 10x more than cash over the last fifty years because they are riskier. Achieving higher returns requires taking more risk. You must accept this reality if you are going to own stocks or any other risky investment.


  • One caveat. Diversification gives you return for no additional risk. Your portfolio is very diversified at WJ.


  • Why have stocks collapsed the last month? Risk has increased. What happens when risk increases? Returns increase. Higher risk means higher returns (see above). As a result, we bought stocks last Monday as their potential future returns went up and sold bonds as their expected future returns went down.


  • Throwing the baby out with the bath water is a common cliché practiced with fervor in stock market sell offs. Certain market players use leverage to enhance returns (they borrow money). When prices fall, they are forced to sell regardless of price to pay back the debt. This creates opportunity. We take advantage of this opportunity through asset allocation adjustments and rebalancing. Our managers take advantage through buying individual stocks and bonds. The following was forwarded to us from the Artisan International Value Fund management team:

“The recent selloff has widened the portfolio discount pushing it into a very attractive mid-to-high-30s range. Importantly, the team has plenty of names on its worklist, including some holdovers from last quarter whose expected returns weren’t attractive at the end of 2019, but which have since become highly attractive.

As volatility has continued, some areas have become more attractive, including energy, travel, e-commerce, and banks and our purchases have been concentrated in those areas. So far, we have bought 9 new names – 7 in the past three weeks alone – a feat we have not been able to accomplish in a number of years due to elevated valuations and liquidity constraints.

We are now at the point of being fully invested with cash levels down to around 2.5% (from a high of near 15% at the end of 2019) and are pushing out the steadier businesses in the portfolio that are at higher multiples for incremental capital to reallocated our estimation, the portfolio has a combination of very good expected returns and a wide margin of safety. We can’t predict the duration of either the Coronavirus outbreak or its market effects, but our view is it is temporary. We continue to execute in the way we always have – being careful about what we buy and how much we pay.”

Also, reflecting their renewed confidence, the fund reopened to new investors after closing several years ago.

We continue to look for opportunities to improve future portfolio returns and will regularly be placing trades to achieve this goal. Please remember our job is not to simply design a robust portfolio, it is to help you stick with the portfolio through inevitable, tumultuous times. Please call if you would like to discuss your financial future. We are here for you. More importantly we hope you and your family stay safe.

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