How We’re Responding to Coronavirus Volatility

Dear Fellow Shareholders,

As the novel coronavirus continues its spread across the globe it is unlikely that you know anyone whose life has not been affected. Our hearts go out to you, families directly affected by the illness, and to those who have and will be affected by the economic reverberations that result from trying to combat its spread. From our MFAMily to yours, we wish you safety, health, and love.

This unforeseen global public health crisis has roiled the financial world. Stock markets have experienced rapid falls into bear market territory and witnessed unprecedented volatility. Bond markets have not been operating smoothly. Gold and digital currencies have not offered protection. There has been no place to hide.

It is understandable if you are scared. With the health of all of us at stake, this is a rational feeling. But when it comes to your investments with MFAM, please know that our team has courageously invested through a variety of scary situations in the past: from the dot com bust to the Great Financial Crisis. You have hired us to navigate this period for you so that your focus can remain on the wellbeing of yourself and your loved ones. Here is what we have been up to…

  1. We are operating normally. Our team began working from home on March 3rd and will continue to do so at least through the end of April. Twice yearly we conduct random business continuity tests and require our teams to work from home, test systems, and practice for the unknown, so closing our offices caused zero disruption to our operations. We have made resources available to outfit home offices that need some sprucing up. And we have leaned heavily on our already flexible work schedules. In short, we are working as we always do to manage your investments soundly.
  2. We have reviewed our portfolio holdings. With business activities necessarily shutting down across large parts of the global economy to combat exponential spread of the virus we have asked the following questions of each portfolio holding:
    1. Is the balance sheet strong enough to weather a prolonged disruption?
    2. Will there be lasting impacts to the relevance of the products and services provided?
    3. Are the company’s leaders taking a stakeholder-centric response to the situation?
    4. Does the opportunity exist to strengthen its position as competitors struggle?

Thankfully, our commitment to only owning businesses that meet our unique definition of Quality has resulted in us having to take very little action in response to failings across this line of questioning. In our opinion, our businesses are far more resilient than average. While many have suffered price declines, we don’t believe many will suffer permanent impairment.

  1. Positioning for the next ten years. Our focus is and has been on investing in exceptional quality growth companies for the long term. Our naturally long-term perspective equips us well in dealing with short-term uncertainty. We are using the markets price volatility to adjust position sizes of current holdings and selectively add companies that didn’t previously offer enough return for the risks involved. We are making these adjustments in our typical manner: with patience and diligence. Given our long-term ownership mentality, the decisions we make now will set us on our investing trajectory for the next decade. While busy, this is an extremely fun time to be an investor seeking to own the best businesses in the world at reasonable prices.

The violence and swings in the stock market can be dizzying. The only way to make sound decisions at times like this, in my opinion, is to have a central set of beliefs to lean on and the wherewithal to respond, not react. For us, our investing philosophy provides a North Star. We believe that the long-term ownership of quality businesses is a winning strategy. We also believe that, eventually, businesses will reflect the value of their future cash flows. For the most exceptional businesses, the bulk of intrinsic value resides in their long-term relevance and significant cash generation beyond the next six months or year. Our steadfast commitment to finding Quality businesses, and having an understanding their durability and intrinsic value, has allowed us to respond prudently as price action pleads for rash reaction. For us, the cacophony of infection rate headlines, bailout rumors, and 1,000-point drops fades to white noise when our focus remains on the simple beliefs that endure.

Like us and the portfolio decisions we make, the financial decisions you make right now will point you along some trajectory for the next decade. We urge you to do so with patience and diligence, too.

Undoubtedly, recent events have caused you to take inventory of your own family, priorities, and daily actions. We hope you use this opportunity to re-center on the simple North Star beliefs that you hold true. After all, investing is all about the “Why” – what growing wealth enables for you, personally. We have all been affected greatly and there is certainly more discomfort to come, but rest assured our team will continue to work hard on behalf of you and your Why.

Onward,


 
Bryan Hinmon
Chief Investment Officer
Motley Fool Asset Management