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  • Chris Mayer

Breathe

Wow, what a week…


How you react to the coronavirus selloff seems a matter of style. If you don’t buy businesses with the idea that you want to own them for years, then what I have to say won’t apply to you.


Coronavirus has taken a bite out of my portfolio in the last six days... and it’s like a shot of espresso to the veins. I’m full of extra energy. Partly because I’ve been able to add to my favorites at what I think are very good prices. And partly because there is a lot more stuff to look all of the sudden.


I also think it’s because my portfolio is where I want it. If you own a lot of leveraged stocks or speculative junk, I imagine this week has been terrifying. But if you own good assets, well-financed with capable owner-operators at the helm, you sleep well.


Yes, there is a lot of fear out there. I have seen this movie before. Maybe the market falls another 10%. Maybe more. Maybe not. Impossible to know. I have to say, though, this is not so bad… yet. A 10% correction is fairly common in the history of markets. It’s not that big of a drop in the scheme of things.


Would you panic if your house fell by 10% in value? Well, if you were leveraged to hilt, yes. If you were looking to flip it, you would be very annoyed, to say the least. But if you bought for keeps and have no debt, or very little debt, probably not. You weren’t planning on selling it now anyway.


As I reflected on past corrections and bear markets I’ve been through, I thought of some behavioral keys to keep in mind as the drama unfolds. Below are six pointers, you might say. I am sure there are many more I could add. I hope you find them helpful.


Price and value diverge. This is the most basic insight of all, but one that can be easy to forget when you see a stock drop 15% (or more) in a few days. At times like this especially, the prices you see reflect the emotions of the moment. They are not careful appraisals of business value.


Now, there is a lot overpriced stuff that needs to come. And some things will come down and stay down because they were overhyped and/or frauds to begin with. But I’m talking about real businesses that generate free cash flow, have opportunities to grow, etc.


My advice is to do your work as you would normally do and don’t take cues from the stock price.


Buy the good stuff. The temptation is to go cheap. I hear and read people talking about such and such stock trading at such a low P/E, etc. But resist. At times like this, when almost everything is down, you probably should look to buy the best stuff.


Why? Because when you look back on this moment three or four years from now, you’ll probably still have that quality name and be very happy you got it when you did. If you own cheap junk, you’re probably out of it – maybe you made a nice hit, maybe not. But now you’re back in the market looking for something to do.


Again, this is based on my own experience. When I look back on past market selloffs, I tend to get wistful about obvious great stocks I did not buy. Why didn’t I ever buy Costco or Danaher when I had the chance? I looked at both during bear markets. And I didn’t buy them because I was too busy mucking around with garbage that I have long since sold and can’t even remember what it was anymore.


The way to build a tax efficient portfolio of multi-baggers is to buy businesses you can hold on to. To do that, you need a certain level of quality.


Pay attention to balance sheets. One thing seared into my brain because of the 2008 crisis is that even an okay balance sheet can become a problem when things get ugly. We have no idea how bad this coronavirus could get or how much of an economic shutdown it may cause. But it’s a lot easier to get through it when you have no debt or little debt. Leveraged stocks always caused me a lot of pain when things got rough. Resist the temptation of those leveraged names – true, they snap back the fiercest, but if you miss… you got a big hole in your boat.


Management will make a big difference. Well, management can make a big difference any time, but especially when things get nasty because there will be opportunities. Witness what John Malone did during the 2008-09 crisis versus what the Tisches did at Loews. Malone, among other things, bought Sirius – which then became a 100-bagger. What the Tisches do with the big pile of cash at Loews? Exactly. (I don’t remember either and I owned the stock!).


Opportunistic management teams can work absolute magic during tough times – maybe they acquire a struggling competitor, or buy back a bunch of their own stock. Stick with the proven value creators and avoid the do nothing management teams.


Don’t rush. The temptation is to bite hard at everything you like, but don’t rush it. Take your time. The market will be here tomorrow. And the day after. If you miss the bottom, so what. Nobody catches the bottom except out of sheer dumb luck. It’s more important to buy something you really believe in and will stick with, because the market will test you. All you really need is one great idea.


Breathe. The temptation is to stay glued to your screen and watch the carnage. Wow, look at all that red! I have a hard time with this too. I have to force myself to go for a (long) walk, take that leisurely lunch and do something else – but get away from the screen. Sometimes I find it hard even just to read, because my mind wanders and wants to go back and see what’s going on.


Well, take a deep breath. This too shall pass. Go about your work and leave that screen of stock quotes alone.


Last week, I quoted Epictetus. Turns out, he's a timely read - his whole philosophy is about dealing with the challenges of being human in the face of adversity. "Remember that it is we who torment, we who make difficulties for ourselves," he says. What he teaches is to be indifferent to things you cannot control. Learn to distinguish what is in your power and what is not. You cannot control what a stock price does. So don't worry about it. Focus on what you can control.


I have a company visit next week. I am sure I will see people working. I will see cars in the parking lot. Life goes on. It's worth repeating the wisdom of that old sage: This too shall pass...


Thanks for reading!


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Published February 28, 2020

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