This is our most important blog since August 2008.
The S&P 500 declined from a peak of 3 393 in late February 2020 to 2 478 as of the 12th of March 2020, representing a 27% decline in just over three weeks.
The idea that markets can fall rapidly is not new for AXIAM clients. We talk about the possibility of market declines at our events and in our one-on-one consultations. It is not possible to predict when these declines will occur.
Conceptually, a market decline is easy to understand but is emotionally challenging as portfolio values decline with falling share prices.
How should we act as the turmoil unfolds?
Firstly, we have no intention to sell
The companies we own generate free cash flow and have low debt. Both are important in times of uncertainty because our companies are not dependent on borrowing money to fund their businesses. At AXIAM, our job is to continue to analyse these outstanding businesses that own great brands and value them so that we can buy them when they are reasonably priced relative to their prospects.
Many of these companies have experienced World Wars, Depressions, Recessions and many crashes and have continued regardless. We do not expect a different outcome this time around. We do not believe that the COVID-19 virus will permanently change human’s desire for the brands our companies own, and the disruption will be severe but temporary.
Secondly, we will buy slowly!
The most challenging aspect of a bull run is to "sit on your hands" and not buy overvalued companies. It isn't easy to wait for opportunities as prices go up and up.
Many clients with new portfolios experienced this waiting in the form of substantial cash balances in their accounts.
The decline is, therefore, an opportunity to increase our holdings. We will do so slowly, as the only reason the market will now stabilise and grow is when the COVID-19 virus is showing that is has stabilised or there is a vaccine.
Is it possible that markets fall further?
Yes. Markets can fall much further from current levels.
So, if we don't want to sell, and we are buying slowly, the hardest part under the current market conditions is to "sit on our hands" as prices fall.
The most challenging aspect of this bear market is to "sit on your hands" until signs of victory are seen against the virus. This is not a decline caused by a financial crisis.
Should a solution to the virus appear markets will rebound rapidly.
“Social distancing” containment strategy
“Social distancing” stops people interacting with each other as they isolate themselves for fear of infection. In some cases, isolation is mandated by governments through travel bans, closed schools, and cancelled public gatherings and events.
Italy has instituted nationwide travel bans, effectively placing people in quarantine and closed all restaurants and non-essential shops. The US has banned all flights from Europe for 30 days from Friday the 13th of March.
These actions halt economic activity in profound ways, and the longer they persist, the more likely businesses are to run out of cash. There have, to date, been no bankruptcies which are common in major crashes. The companies we own, will not face bankruptcy. They have little to no debt and will be able to access funding very easily as they produce significant free cash flow.
The current situation has the potential to get far worse. Failing businesses will not be able to pay their debts, thus affecting the banks that lent them money. When this starts happening, the government has to step in. Large scale co-ordinated government intervention is a signal of market capitulation where the market moves from panic to defeat.
Opportunities are best when times are most challenging.
Many things in the coming weeks will be unknowable, and we will proceed with cautious conviction. The companies we own are not at risk.
We accept that this period will be emotionally trying. However, this current market movement is likely to offer an opportunity of a lifetime to invest further!
We will do so once it is clear the virus is under control.
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