by Scott Ronalds

Below is our Chief Investment Officer's (Tom Bradley) letter to clients from our Quarterly Report.

It feels like I’ve spent my whole career doing one of two things — either talking down people’s return expectations (as I did in my last Brief) or talking them up (as I’m about to do now). Rarely am I in between. My direction changed quickly this time because the coronavirus turned everything on its head and our clients’ portfolios declined significantly.

Before I talk about the future, it’s important to understand some of the factors that caused the meltdown to be so swift and powerful. The biggest one was the nature of the threat. We haven’t seen anything like the coronavirus before and weren’t prepared. It isn’t a war being waged in distant lands but rather is impacting our families’ welfare here and now. And it’s a crisis from which there’s no gain for the pain. The economic legacy will be a net negative to the world’s wealth.

But there were other factors at work. The virus hit at a time when investors were complacent about risk. As the 11-year bull market matured, the rewards increasingly went to those who were using more debt and taking more risk. In some cases, this involved investing in securities and products that weren’t easily tradable.

Debt and illiquidity made for severe, broad-based declines and dislocation. We had secure, government-backed securities trading erratically and for a time, lower rated bonds were holding up better than higher quality issues. And the daily moves in stocks were head spinning, with some small-cap stocks (illiquid) down over 25%.

We know that many of you are finding it difficult to reconcile owning financial assets with what’s going on around you. It’s important to remember, however, that while the stock market impacts our daily lives, it doesn’t mirror them. It has already adjusted to what we’re reading today and is estimating what the future will look like in 12-18 months.

How do we manage your money through this turbulent and unpredictable time? Well, be assured that our fund managers are doing everything they can to understand the risks that our companies face. They’re stress testing each one to see how much dislocation they can sustain and when necessary, are adjusting the companies’ long-term outlooks to reflect the new reality.

Salman and I, in addition to monitoring our managers and trying to assess the impacts of the coronavirus, are focusing on what we know about markets and investor behaviour. In this regard, there are some important things we can act on.

The starting point for tomorrow’s returns is today, not six weeks ago. We can’t be fighting yesterday’s war. The risks and rewards are vastly different and must be assessed rationally.

Stock markets consistently overreact in times of crisis. We’ll only know in hindsight whether the adjustment in March was too much or too little, but we can see now that the reaction in certain areas of the market was excessive.

Stock market bottoms can’t be predicted with any precision. Our strategies for what’s ahead can at best be ‘approximately right’.

The market will bottom well before the pandemic and economic plague are declared over. If we wait for certainty, we risk missing out on a bulk of the price recovery.

And last but not least, be greedy when others are fearful. This Warren Buffett axiom is an excellent risk management tool. When others are running for the exits, we know the risks are in plain view and it’s a good time to invest. We just don’t know if it’s the best time.

We encourage you to read the rest of our Q1 Report, where we provide more details on our specific strategies and what we've been doing in each of our funds during this challenging time.