Howard Marks: Latest Memo – Nobody Knows II, Coronavirus And It’s Impact On Markets

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Howard Marks recently released his latest Memo titled – Nobody Knows II, in which he discusses his view on the coronavirus and its impact on markets saying:

Over the last few weeks, I’ve been asked repeatedly for my view of the coronavirus and its implications for the markets.  I’ve had a ready answer, thanks to something from my January memo, You Bet!  As you may remember, I drew heavily on quotations from Annie Duke’s book on decision making, Thinking in Bets. The one that stayed with me most – and that I’ve used a lot since the memo was published on January 13 – is this one:

An expert in any field will have an advantage over a rookie. But neither the veteran nor the rookie can be sure what the next flip will look like. The veteran will just have a better guess. (Emphasis added)

In other words, if I said anything about the coronavirus, it would be nothing but a guess.

In conclusion Marks provides the following insights on what investors should do now, saying:

What to Do?

These days, people have been asking me whether this is the time to buy. My answer is more nuanced: it’s probably a time to buy. There can be no unique time to buy that we can identify. The only thing we can be sure of today is that stock prices, for example, are a lot lower in the absolute than they were two weeks ago.

Will stocks decline in the coming days, weeks and months? This is the wrong question to ask . . . primarily because it is entirely unanswerable. Since we don’t have answers to the questions about the virus listed on page two, there’s no way to decide intelligently what the markets will do. We know the market declined by 13% in seven trading days. There can be absolutely no basis on which to conclude that they’ll lose another 13% in the weeks ahead – or that they’ll rise by a like amount – since the answer will be determined largely by changes in investor psychology. (I say “largely” because it will also be influenced by developments regarding the virus . . . but likewise we have no basis on which to judge how actual developments will compare against the expectations investors already have factored into asset prices.)

Instead, intelligent investing has to be based – as always – on the relationship between price and value. In other words, not “will the collapse go further?” But rather “has the collapse to date caused securities to be priced right; or are they overpriced given the fundamentals; or have they become cheap?” I have no doubt that assessing price relative to value remains the most reliable way to invest for the long term. (It is the thrust of the whole discussion just above that there’s nothing that provides reliable help in the short term.)

I want to acknowledge up front that ascertaining intrinsic value is never a simple, cut-and-dried thing. Now – given the possibility that the virus will cause the world of the future to be very different from the world we knew – is value too unascertainable to be relied upon? In short, I don’t think so. What I think we do know is that the coronavirus is not a rerun of the Spanish flu pandemic of 1918, “which infected an estimated 500 million people worldwide – about one-third of the planet’s population – and killed an estimated 20 million to 50 million victims, including some 675,000 Americans.” (history.com) Rather, it’s one more seasonal disease like the flu, something we’ve had for years, have developed vaccines for, and have learned to deal with. The flu kills about 30,000-60,000 Americans each year, and that’s terrible, but it’s very different from an unmanageable scourge.

So, especially after we’ve learned more about the coronavirus and developed a vaccine, it seems to me that it is unlikely to fundamentally and permanently change life as we know it, make the world of the future unrecognizable, and decimate business or make valuing it impossible. (Yes, this is a guess: we have to make some of them.)

The U.S. stock market’s down about 13% from the top. That’s a big decline. It would be a lot to accept that the U.S. business world – and the cash flows it will produce in the future – are worth 13% less today than they were on February 19. That sentence may make it sound like I think the market’s undervalued. But that’s not the proper interpretation. If it was overvalued on the 19th, rather than being undervalued today, after the decline, it could just be less overvalued. Or it could be fairly valued, or even undervalued, but it isn’t necessarily.

I think the stock market was overvalued two weeks ago . . . somewhat. That means I think that today, even with the short-term prospects of business somewhat diminished, it’s closer to fairly valued, but not necessarily a giveaway. In the starkest numerical terms, before the rout, the p/e ratio on the S&P 500 was 19 or so, roughly 20% above the post-World War II average (and there are arguments on both sides regarding the current applicability of that average). Thus, after a 13% decline, you’d have to say the p/e ratio is pretty close to fair (unless earnings for the year will be very different from what they previously had been expected to be).

Buy, sell or hold? I think it’s okay to do some buying, because things are cheaper. But there’s no logical argument for spending all your cash, given that we have no idea how negative future events will be. What I would do is figure out how much you’ll want to have invested by the time the bottom is reached – whenever that is – and spend part of it today. Stocks may turn around and head north, and you’ll be glad you bought some. Or they may continue down, in which case you’ll have money left (and hopefully the nerve) to buy more. That’s life for people who accept that they don’t know what the future holds.

But no one can tell you this is the time to buy. Nobody knows.

You can read the full memo here: Howard Marks, Latest Memo, Nobody Knows II, 3/3/2020.

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