In March 2009, right in the middle of the great financial crisis, the S&P 500 stopped its decline and began rallying higher in a big way. However, if you had read the headlines at that time, you never would have known that this would be the start of the longest bull market in history. Just like today, you had so many pundits telling you not to buy the rally, and that we are certainly going to test the lows again. In 2010, when it was clear that the economy had recovered, those same pundits were telling us that a double-dip recession was guaranteed. Not only were the lows not tested again, but also the U.S. economy has yet to fall back into a recession. Those patient investors of 2009 were well rewarded for their courage.
Similarly today, we have more than our fair share of pessimistic market pundits. I have no time, or interest, in trying to predict short-term moves in the stock market. As investors in companies, we need to ask ourselves the following four questions:
- Do we believe that a company’s ability to grow earnings over the long-term will be unaffected by a long-lasting pandemic and/or recession?
- Can we buy these companies for new clients and clients that deposit cash at reasonable valuations?
- Do we believe that these companies will have the ability to reinvest their future cash flows at above-average rates of returns?
- Do we believe that, compared to other asset classes, these companies will deliver a better relative rate of return in the long run?
For those that have followed me for years, it will come as no surprise that my answer to all four questions is “yes”, and that I am bullish on our stock portfolio. In our opinion, now more than ever, it is time to upgrade your portfolio and stick with high-quality companies. When I look at some of the companies that our clients hold, like Microsoft, Visa, Amazon and Constellation Software, to name a few, I see their current growth trajectories as slightly delayed but not impaired. Given their stocks’ performance in the current market downdraft, investors clearly agree overall. In our opinion, there aren’t that many high-quality companies in North America with experienced management, strong balance sheets and enormously profitable business models. As a result, we believe these companies will be re-rated with much higher valuations than ever before.
I am going to let others worry about what happens next to the market. I will be too busy focusing my efforts on finding the best businesses for our clients.