Woodstock Quarterly Newsletter / Q2 2020
We’re in another financial crisis. In 1999-2000 it was a valuation of tech stocks bubble; in 2008-2009 it was a financial and banking solvency crisis; and beginning in March 2020 it is a medical/financial crisis where, as with an aggravated human immune system response, our reaction to the pandemic will cause great financial harm.
However, as elected leaders responded to public health experts’ concerns quickly amid uncertainty, several trends in the financial world were uncovered—meaning exposed at low tide—which ought to give investors concern. The first was described this way: “for still obscure reasons, a banking system that apparently is more than adequately capitalized was unable to meet a sudden demand for funds on behalf of dealers who warehouse immense portfolios of government debt,” referencing the continuing from September 2019 “repo” crisis. Another was the explanation for tumultuous trading activity at the end of March 2020: “the forced selling, a clearing out of trades built up over years that used borrowed money or other forms of leverage (see derivatives) to juice returns, has mostly played out.” The goal of some of these strategies is to transform the riskiness of stocks to be the same as that of bonds, meaning to generate the elusive “enhanced bond return,” as a substitute for an equity-like return, for fear of equity-like volatility. As the above two examples illustrate, there are forces working on the valuation of equities that are far removed from the earning power and stability of individual companies, especially in a turbulent time.
We, as investors, want to control what we can control. In an article entitled “The Winner’s Game”, author C.D. Ellis describes the “game of investing” as divided into several levels. The splendor of the game is that investors can “engage in or ignore each level of the game.” They are free to choose and are not penalized for not participating where they don’t wish to or are not qualified to because it is a positive-sum game. Quite an opportunity. The beginning levels are the winner’s game: the optimal asset mix for each investor. If one wishes, that’s it. Done. Consult your investment manager and set it. The loser’s game includes choosing managers to manage each component of a portfolio and how actively or passively to pursue changing strategy, market timing and trading. Ellis concludes: “for every investor there is a best fit long-term policy and your following that best policy takes nothing away for any other investor.” At Woodstock we’re dedicated to winning the winner’s game for our clients. Once the asset mix is set, the hard work is adding good companies to the portfolio (see the letter on this topic from our president, Adrian Davies).
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We thank you for your support and want you to know that we are dedicated to serving your best interest.
William H. Darling, Chairman & CEO