Current Market Conditions And Coronavirus

12 March 2020

Hey, The Investor’s Podcast Network Community!

The past few weeks in the market have been crazy to say the least. And last Monday, we had the worst trading day since the financial crisis when S&P500 fell more than 7%. It’s yet to be seen who will emerge as winners when the dust settles, but if there is something we learned from financial history, it’s that volatility always transfers wealth.

So what can we, as value investors, do to ensure that we’re taking advantage of the situation? Before I continue, please allow me to apologize if anything in this month’s newsletter comes off wrong. Like you, I’m horrified of what is happening around the world with the coronavirus.

Warren Buffett shared his thoughts on this too in an interview with Becky Quick on February 28th. When asked about the impact of the coronavirus on his investment decisions, he said: “You don’t buy or sell your business based on today’s headlines.” Warren Buffett is the best example of this. He bought his first stock at age 11 back in 1941 and ever since, he has bought stocks every single year regardless of wars, multiple pandemics, and 14 different presidents (7 Republicans and 7 Democrats).

This leads directly into my next point. As you’re looking at your portfolio and your watchlist, consider if the coronavirus impacts the intrinsic value of the stock in question. In the short term, the answer is most likely “yes.” But let’s consider the long-term impact of the coronavirus.

Being contrarian by nature, one industry that I have on my radar is the airline industry. I’ve built a position in Southwest Airlines long ago, and I’ve been considering adding more to my position and/or adding a new airline. This might sound counterintuitive to you because airlines are reported to lose as much as $113B globally because of the coronavirus, and just last night, yet another travel ban was imposed. Knowing this, anyone in their right mind would shun airline stocks, right?

Well, as an airline customer, how much less did you travel in 2019 because you feared pandemics (we tend to temporarily forget that this is not the first pandemic nor will be the last)? Would you still need / like to travel when there is no fear of coronavirus? I guess you see my point of why I’m being greedy when others are being fearful. I don’t know how long the coronavirus will rage on, but here is what I do know:

  • For the next few quarters at least, the earnings for the airline industry will look horrible.
  • To estimate the value of a stock, we need to discount the value of the cash flows for the remainder of its lifetime (not the next few quarters).
  • We’re prone to have a massive number of cognitive biases that misjudge probabilities severely, which in turn leads to inefficient financial markets.

The coronavirus is absolutely horrible for those impacted. Still, as a long-term determinant on the intrinsic value of an airline stock (and most other industries), its true effect is marginal. I would argue that while the airline industry temporarily faces a short-term crisis, it has not fundamentally changed in any way. Consider brick-and-mortar retail that has changed dramatically when Amazon and other online competitors entered the market. As opposed to the airline industry, retail won’t “go back to normal.”

Remember that financial markets tend to confuse “risk” with “uncertainties.” As you look at your own portfolio and your watchlist, consider what you think is the case and make your investment decisions based on that.

As always, I’ve included a write-up of one of the companies that Preston and I find trading at an attractive price level. You can find it here. It was written on February 23rd, and you won’t be surprised when I say that a lot more stocks are trading at an attractive price level today. You can check out the entire index of free intrinsic value stock assessments here.

Also, make sure to check out the new ad-free bonus episodes on our Extra feed. In the most recent episode, Tobias Carlisle pitches Southwest Airlines. In next week’s episode, we’ll be talking with Tobias about the business model of running an ETF.

Your Friend,