Woodstock Quarterly Newsletter Update
Our Winter 2020 Quarterly Newsletter was written before Covid-19 became a major issue for the market. We realize market conditions have changed since we wrote the articles, but the sound principles of long-term investing have not changed. Regardless of market conditions, we believe our clients are best served by holding a portfolio of high-quality stocks for the long-term.
Each day brings new, negative news about the coronavirus and how it is impacting the global economy. Just as each bit of negative news has been met with new selling, one could project the bad news unfolding for several more months and reason that the market will continue to sell off in lockstep with the expansion of the virus. This reasoning is flawed. The market has been moving down as investors expand their comprehension of the devastation caused by the virus, as well as the economic restraint intended to limit its spread. We will most likely experience a recession, and we will still be feeling the economic effects several years out. Nevertheless, this too will pass.
There is some level at which the market will anticipate all the negative news to come. Investors are supposed to be valuing companies based on the present value of their future cashflows. We believe the market already anticipates significant economic damage from the pandemic, and yet it continues to sell down as investors obsess about the near-term news flow. When the economy recovers, companies will generate stronger cash flows. By focusing on the current bad news, investors are forgetting that the normalized cash flows are likely to be much higher than those generated in 2020. We believe you will be rewarded for holding stocks now, as most investors are distracted from what these companies will look like when economic conditions and growth potential are restored.
Adrian G. Davies