When Restraint Feels Like Foolishness
There are times when restraint and patience may feel like foolishness. In investing, these times typically feature an “obvious thing to do”. During the late 90’s build of the first internet bubble, it seemed obvious that the easy money was betting on the latest Silicon Valley IPO. The business model, prospects for earnings and cash flow, and any real consideration of valuation (paying a reasonable price) was pretty well thrown out the window at the height of the frenzy; all that was required was a “.com” for admission. So “obvious” was the formula for investment success, that some even quit their jobs to day trade and reap the easy rewards.
We remember this time well as a disciplined long-term investor , watching internet stocks with no path to profits race higher while investments in good, growing, solidly profitable, and reasonably priced companies lagged far behind. There were many moments when restraint—an unwillingness to abandon sound long-term investment principles to follow the investing herd headlong into internet stocks—felt like folly. Put simply, FOMO (fear of missing out) is a real emotion. A poster child of the era was Webvan , a pioneer of home grocery delivery, whose November 1999 IPO valued the company at nearly $5 billion at a time (the stock closed its first day of trading up 65% with a market value of $8 billion) when the company’s life-to-date revenues were less than $5 million and losses were more than $100 million. In the end, the true folly became clear. Webvan filed for bankruptcy in 2001 after only three years of operation. And while there were a small handful of internet boom stocks that were good long-term investments, Amazon.com for example, many were not and the years that followed that tech bubble burst and crash brought better perspective to what was foolishness and what was not.
This is another one of those times when restraint and patience may feel like foolishness for disciplined long-term investors. FOMO is in effect. The “obvious” thing is to buy all “stay at home” stocks and abandon everything else and we’re seeing signs that thoughtful consideration of valuation and long-term business prospects are going out the window again. Technology stocks are again racing ahead and leading the overall stock market higher. Thankfully, we have exposure to companies that are benefitting from the stay at home trend in our stock portfolios—Microsoft, Google, Intel, Apple, Spotify, J.M. Smucker—although we believe these companies have a combination of reasonable value and long-term business prospects that warrant investment beyond the current trend. We are also seeing better near term returns from our healthcare industry exposure.
Other portfolio investments, where business fundamentals are seeing more near-term pressure from COVID-19 and the resulting economic impact, are currently lagging behind. However, in these cases we believe our desired combination of value and long-term business prospects still warrants their place in the portfolio. Let us be clear that we are sober about the risks in the current environment and do believe that there are some fundamental and lasting shifts emerging from this global crisis. We’re seeing some brand new trends emerging and also a marked acceleration in structural changes that were already underway in the economy. We’re doing our best to make our long-term investments with that in mind.
As we previously noted in our Q1 market update last month, we still believe patience will be required and rewarded. Since the very steep decline in the few weeks leading up to the market low on March 23 rd , the stock market has rebounded strongly. In fact, just this week the NASDAQ index, heavy laden with technology companies, crossed back into positive territory for the year. Of course we welcome and are thankful to see the lift in our portfolios, but with so much uncertainty and economic disruption, we find it most reasonable to expect that market volatility (and associated potential bargains) may be with us for a while. For more context, see our boulder into the pond analogy from our last market update . We’re keeping some flexibility to take advantage.
Time will ultimately tell, but we’d note that this patience and restraint idea was affirmed by Warren Buffett in his recent Berkshire annual meeting interviews when he shared that he hadn’t yet been coaxed to pounce on bargains that typically emerge in periods of intense market and economic disruption. In fact, Berkshire’s cash grew another $10 billion in the first quarter to $137 billion, or nearly half of the company’s current market value!
In summary, we encourage folks to stay buckled up for the near term ride but firmly optimistic in the benefits of long-term investing through a thoughtful and disciplined approach . And though patience and restraint may feel foolhardy from time to time, we believe them to be an appropriate stance for the current environment and we assure you that only a broader time perspective is reliable to make things clear.
Please let us know if you have any questions about our client portfolios or approach. Also, a continued thank you to everyone for the introductions to friends in your life who we might be able to help. We’ve met some amazing people recently!
Finally, a Happy Mother’s Day to all the moms. Hope you have a chance to soak up the warm spring sun along with all the love and recognition you deserve. We wish you the best!