Keep Doing the Basics Well

What a quarter it has been. COVID-19 has abruptly reminded us of the many frailties in our global society. The world seems almost paralyzed by the shock. As bad as the reaction in financial markets has been, it pales in comparison to the magnitude of the real economic pain this virus is causing across the globe, not to mention the widespread fear and the impact felt by those who are directly affected by the illness.

Remember that the world is, and always has been, a scary place. This is not the first time something bad has happened, though every crisis has its nuances. It won’t be the last time either. The nature of the risks we face may change over time, but “do not let us begin by exaggerating the novelty of our situation.”CS Lewis.


We entered the first quarter well-positioned for a pullback in the market (generally speaking – we certainly didn’t foresee the COVID-19 crisis) with ~20% in cash and strong balance sheets across our portfolios. These are the two things you want going into a bear market. We are ready to deploy cash as we see the right opportunities to do so.

It’s at times like these that we need to remind ourselves of the basics and keep doing them well. We’ve highlighted 4 principles that we think are especially relevant to a crisis like this:

Basic Principle #1: Be proactive about asset allocation

To the extent that it is possible, keep enough cash aside to meet near-term liabilities and contingent liabilities. You don’t want to be forced to liquidate large portions of your stock portfolio or other assets in the middle of a liquidity crisis. A focus on asset allocation also reduces the urge to engage in speculations about which way the market will head next, which are seldom profitable.

Basic Principle #2: Beware of leverage

The sustainable return of businesses across the board is going to take a knock during this economic crisis, with a few exceptions. A major factor that will determine which of those recover and which don’t is leverage. A strong balance sheet is the most valuable asset a business can have during a crisis. Overleveraged companies are likely to become distressed and may be forced to raise capital at the worst possible time, permanently impairing the equity of existing shareholders. Financially sound businesses are more likely to ride out the storm and recover.

This has always been a major focus in our investment process. Our portfolios are well-positioned in this regard.

Basic Principle #3: Diversify

This crisis has affected the travel industry more than any other, and it seems unlikely that this will recover in a hurry. Grocery production, medical, pharmaceutical and certain technology companies have been relatively unaffected. Some countries have also suffered worse outcomes than others. Geographic and industry diversification remains a cornerstone of financial risk management.

It is important, however, not to buy overvalued or low-quality businesses for the sake of diversification. Diversify within the constraints of quality and valuation.

Our portfolios are well-diversified on both an industry and geographic basis.

Basic Principle #4: Keep your discipline

The reality is that it’s probably too late to address the first 3 points. They needed to be in place before the crisis hit us. Without a doubt the most important thing to do through the crisis is to keep your discipline. Emotional decisions are seldom good decisions, yet emotion drives markets more than anything else in times like these. Stick to your financial plan. We are sticking to our investment process.

Remember that the shares you own are not merely pieces of paper and numbers on a screen. These shares represent ownership of very real businesses providing very real goods and services. These businesses are more substantial and secure than most of our own private businesses, yet because we are made aware of their market value on a tick-by-tick basis, and because we are detached from their reality, we are more inclined to worry about them and react impulsively.

Traditional economics assumes that we are all rational thinkers, therefore more information makes us better decision makers, but this simply isn’t true. Because we are not always rational, more information can feed our irrationality and make us worse decision makers. This is especially true of financial markets where we are constantly bombarded with information and live prices. Perhaps this even applies to the situation we find ourselves in with COVID-19. Don’t let the deluge of negative information distract you from doing the basics well.