Because You Asked: What Are You Telling Investors Now?

We review investment performance and provide our take on current events related to it to our investors regularly.  Today we decided to share our latest investor communication here:

There is an old song by Frank Sinatra called Tina;  we will talk more about the idea of “TINA”  later in this letter, but if you are so inclined you can listen to it here: https://www.youtube.com/watch?v=ts9qRJRJEec.  

The Volatility of Fear:

You may not have asked for it, but you have been selected to experience one of the most volatile periods in history for investors.  As noted in our last correspondence, we have already experienced the worst one-day drop as well as the biggest one-day gain in history plus the largest one- day gain in oil prices in an extremely short time frame.  All of that craziness concluded March 31, with the worst quarterly loss in history of some 20% on the markets overall.  Horrible, heart-stopping volatility! 

Strangely enough, this all came about not because of Economic issues, but rather the Health issue of Covid-19.  But the Market did not respond as much to the Facts of Covid -19 as to the Fear of Covid-19.  What the Market fears most is the unknown, and Covid-19 is a prime example.  As we listen to the daily news, we are often astounded to find that the life-saving strategies of yesterday are found to be of no effect today, and the prognostications of last month are proven much worse or much better than projected.  These continuing unknowns cause the Market to plunge or blow up with each new revelation.

This same Fear is driving human behavior and creating angst far above the facts that have been revealed.  We are closing in on 130,000 US deaths related to Covid-19 and more will die in the coming months, with every life lost being precious to their families and friends.  Part of our fear response is that it is new, unfamiliar, and unpredictable.  To provide some context, about 650,000 people die every year of heart disease, according to the CDC: www.cdc.gov/heartdisease/facts.htm.  But heart disease is sadly more common and more familiar to us, and while there are steps that we could take to try to prevent heart disease, we most often don’t; obviously, it does not cause a Fear reaction.

Ideally, we would consider the statistical facts of Covid-19 and approach it with the prudence and commonsense required of any life-threatening issue rather than letting the Fear of it drive us to very unhealthy conduct that perhaps even more so threatens our lives.  Specifically, we have been reading and hearing about gaps in prenatal care, delayed treatments for serious illnesses, missed childhood vaccines, mammograms, and other screenings and checkups that we normally follow to maintain our health.  There is some real concern about the wave of negative health issues that may result from the current lack of general medical care, separate from Covid-related issues.

Repercussions:

On June 30, we came very close to experiencing a 20% gain (19.9%) on the S&P 500 for this quarter, which would be the best since 1975 and only the 2nd time since 1932 we have had back-to-back quarters with a 20% loss followed by a 20% gain. The DOW gained 15.6% and the NASDAQ 30.6% for the quarter.  Not bad!!!  Before you get too excited, the DOW is still at a 9.5% loss and the S&P 500 has a 4.5% loss for the year, due to the severe March crash, while the NASDAQ has gained 12.1% for the year.

What?? This makes for an interesting observation:  the NASDAQ fell the least in March and gained the most afterward.  This data seems to confirm a long-term trend we have been observing, which is that Technology and Communication Services Companies (the companies that primarily make up the NASDAQ index) are leading the way in a rapidly changing cultural and business lifestyle.  Why?

Someone has said, “The Detour has become the Destination” due to Covid-19.  That is, the changes we have been subjected to in the disruptive process of dealing with Covid-19 have been in place long enough to become habit-changing.  We no longer run to the store, but rather it be cars or carrots, we order online, and either have it delivered, or get drive-up delivery. Business folks are not flying to offices or other countries, but are rather utilizing ZOOM meetings.  Educational classes, organizations, conferences, and church meetings are now online and experienced by millions.  Need a doctor?  Set up a Zoom medical session. While many would say, “it ain’t the same”, others would say it’s at least tolerable and maybe the majority would say, “I like it”.  The Detour is rapidly becoming the Destination.

Now, I said all that to say that this sort of forced experience or our current necessity is what I believe is causing the Technology and Communication Services companies to perform so well as investments.  They are the ones creating the innovations essential to allow the economy to still function to a reasonable degree even when we can no longer meet face to face.

Do You Remember Creative Destruction?

Ex: my kitchen demo

You may remember we once wrote about a process called Creative Destruction, expressed by the economist Joseph Schumpter. We noted that the typewriter business was destroyed by the advent of the word processor and the fax machine by e-mail and Doc-u sign, and on and on ad infinitum.  And so it will be, as we progress towards this new Destination.

Many businesses we have always known and used will become rapidly obsolete and “the way we’ve always done it”, will not be the way we do it now, or in the future.  While many of those obsolete businesses owners and employees will experience loss, other innovative and aggressive entrepreneurs will see opportunity in being able to establish and grow businesses at a fraction of the cost of the past, via the internet and social media.  Million-dollar businesses will be run out of a basement or from anywhere else in the world as long as they have internet accessibility.  Changes are coming at an ever-increasing pace and we have to be willing and able to respond accordingly in our daily living as well as our investments in the future.

Implications for Investors: TINA

All of this change, uncertainty, and fear have driven some investors to seek safety by buying various Treasuries guaranteed by the US Government.  As the demand for them has increased, the yield (amount of interest paid) has and will continue to decrease.  Currently:

  • a 2- year US Treasury will pay .152 per year or $1.52 per $1000.
  • A 5-year Treasury pays .288 or $2.88 per $1000 invested
  • and a 10 year .658 per year or $6.58 per $1000.

These returns are hardly believable but are a direct result of Fear, both justified and unfounded.

This brings us back to TINA.  Yes, it is an old Sinatra song, but it also stands for an anomaly we currently face in investing.  While we may abhor and distrust the rampant volatility of the Market with its frequent ups and downs, when one compares it to the return on Treasuries, There Is No Alternative… or TINA.

The risk one incurs by investing in the stock market is the premium for the reward you will ultimately receive.

Though there are days that we have doubts, questions, and seriously ponder current circumstances and the best path forward, the fact is, “This too shall pass”.  Just as with the flu, a vaccine will be developed at some point, knowledge of the virus will evolve along with treatment, and the rampant fear will abate.

In the meantime, the new destination journey will require evermore innovations and creations giving birth to new companies.  As these companies grow and change, we will profit by having invested in them.

Wishing all of you a healthy and manageable next six months,

TINA (a.k.a., John and the Advisors Group)

 

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn