1st Qtr. Newsletter- March 2021
Investing vs. Gambling
Recently – not for the first time – there has been a lot of speculative activity in the market. Maybe it is pent-up frustration from people being cooped up for months at home, hiding from the virus, with not enough excitement. We have seen the stocks of companies barely formed, with little track record and nothing much in the way of earnings, streaking upward in price based on internet rumors and not much more. Often the upward rush is followed by a collapse. The time horizon of “investors” – pardon the term – seems to have shortened from several years to …. weeks? minutes? The government makes noises about needing to protect the public from such wild speculation, but good luck with that! I say let ‘em have at it, either they will make a bunch of money or they will learn a lesson – a benefit either way. We do not see this casino mentality as being any particular threat to real investors, who can tune it out and ignore it. Remember, if others behave foolishly, chasing after rainbows and butterflies they cannot catch, it doesn’t change your investments or mine. The great thing about the stock market is that one does not have to play the game, if things don’t make sense.
The recent frenzy of speculation is a very different activity from investing, which is what Monarch Capital was set up to do. Our approach is to buy and hold shares in solid, profitable companies whose businesses look durable enough to last a long time. A regular quarterly dividend is a good sign of steady cash generation, especially if it increases year after year. We also look for growth, but try to avoid overpaying. This placid strategy may appear stodgy at times when a raging bull market is attracting all the attention and risk seems remote. But quiet, tenacious, businesslike investing has worked quite well in growing and preserving wealth for our customers over a long period of time, now going on several decades. We think it offers the best chance of success, and peace of mind as well.
Coronavirus Shutdowns Widen the Income Gap
The stock market has suffered through three big sinking spells over the past twenty-some years. First there was the 2000-2003 collapse of the very popular (and very overpriced) technology stocks. Then in 2008-2009 came a meltdown in bank and financial shares, a memorable period in which the stock market fell by about half. With both of those, you might now say there were observable excesses that might have indicated trouble was coming. But could anyone have foreseen the advent of Covid-19 and its damage to the world economy?
The U.S. stock market tanked last March when the virus appeared, losing about 34%, with an amazingly quick recovery later in the year. But the experience was harder on some people than on others. The degree to which our country has bounced back depends on where you look. Although coronavirus itself threatens the whole population, the government lockdowns have cruelly amplified the difference between rich and poor. Those near the top were able to work comfortably from home via computer, and never missed a paycheck. Many of them see no problem with a long shutdown; some may even prefer it. Meanwhile, at the lower end of the economic scale, jobs and lives were shattered. There are still 10 million fewer Americans employed than there were before the virus hit us. We all know of small local enterprises, especially restaurants, that are gone – out of business – because financially they could not survive without customers. It’s great that the overall U.S. GDP number has more or less recovered to pre-Covid levels, but a lot of families’ lives are still upside down. This pain does not show up in some of the robust economic figures, but it’s there. For schools, for the arts, family gatherings, travel, for a hundred other worthwhile human activities, life is still very far from being “back to normal.”
The Good Companies Show Their Quality in Bad Times
Share prices fluctuate more than share values.
John Templeton (1912-2008), investor
Considering how the coronavirus wrecked so many of our habitual and favorite activities, the misery it caused, and the horrendous economic costs of shutting down parts of the economy, it is really surprising how well America’s major companies have held up. On the next page is a table showing operating earnings for some of the stocks we follow. You will recognize the names, and probably have some in your own portfolio. With several of them, there was a contraction in earnings for the blighted year 2020, but it’s not as if they fell into losing money or anything. For many, looking at profits for the whole year, you would never know there had been a crisis at all. Overall they show remarkable resilience in getting through a really severe period of stress. In making investments, this kind of durable earnings power is a highly desirable quality to look for.
There was more damage in stocks related to restaurants, travel or entertainment – businesses that depend on large gatherings of people. Examples would be Disney, the air carriers, ocean cruise lines, etc. They had a terrible 2020, but most will recover.
Let Not your Heart be Troubled
For reasons I have never understood, people like to hear that the world is going to hell.
Dierdre McCloskey (1942 –), historian
Investors need good judgment in order to make sound decisions, and it is almost impossible to think clearly when we are subjected to nonstop negative thinking. Pessimism is like a virus, it’s bad for us and highly contagious. Every day there are upsetting news stories about how many of us have died from Covid, and how the virus is evolving into new varieties, or about the latest rude remarks that one politician, actor or “celebrity” said about another. China plans to take over the world, killer bees are coming, taxes are going up, the icebergs are melting, and some computer hacker in Vladivostok is fixing to clean out your bank account. The negative drumbeat of potential worries continues without end, probably because disturbing headlines tend to grab our attention, and our attention is what the media want. If we can get away from this for a couple of days, it can be very calming.
Taking a walk through the woods in summer, you may roll over a log with your foot and uncover an ant nest. This is a calamity for the ants; their secure hideaway is laid bare, and some were crushed by the log. Others scurry in all directions, trying to carry eggs to safety, and none of them know what to do. After a while, the survivors will regroup and build another nest. We humans are a little like that, after an unexpected disaster such as a violent storm or earthquake. It is sort of how we are dealing with the coronavirus, now beginning its second year of tormenting us. At first we felt panic; now there are vaccines – several vaccines – and hope, and we feel confident enough to bicker with each other about the right or wrong ways to do things. We still need to be careful, but gradually we are adapting. We are learning to deal with the problem. So it is with many of the things we fear.
—Written by George Donner