Almost exactly 5 years ago amidst the initial stages of the COVID-19 pandemic, I wrote a blog post about our framework for investing amidst a crisis. Today, we find ourselves again in a similar situation only this time, not from a virus, but from US President Donald Trump’s plan to implement tariffs on most countries in the world.

It is certainly understandable to be nervous about the situation, and we are as well. It is not difficult to imagine a scenario where tariffs cause both inflation and lower economic activity leading to a dreaded state of “stagflation”. Furthermore, there could be retaliatory measures against US companies, leading to further economic slowdown around the world.

However, the situation was highly uncertain in every past stock market correction as well.

  • In 2022, inflation was running rampant resulting from the COVID-19 stimulus and supply chain disruptions.
  • In 2020, economic activity halted nearly overnight to prevent the spread of COVID-19.
  • In 2008, the failure of Lehman Brothers led to a global credit freeze with wide potential repercussions

In each crisis, there are certainly scenarios where things worsen and spiral out of control. However, people & governments generally try to fix things to ensure that the worst outcomes do not get realized (even if the methods are controversial), and investors who could stomach the volatility were richly rewarded when things inevitably recovered. There is never nothing to worry about, and investing is not about avoiding risk but about deciding which risks to accept.

To be sure, there were casualties in each crisis: investors in Lehman Brothers and Washington Mutual lost all their money, while many “COVID-winners” such as Peloton never recovered. This is why we place strong emphasis on using fundamental analysis to own high-quality businesses, to have confidence that the companies we own will not only survive but gain market share in weak times.

There are two things are we doing in response to the tariff situation.

The first thing is to dispassionately evaluate each company’s situation with tariffs.

Apple’s stock, for example, was down by 9% today. Tariffs are certainly not good for Apple, and it makes sense the stock is down. Digging deeper however, 36% of Apple’s sales are from the United States, and of that 36%, about 27%-30% (and a higher % of profits) comes from Services such as iCloud+, AppleCare, Apple Pay, and the App Store. Almost all of Apple’s products are manufactured outside of the United States, so only about a quarter of Apple’s profitability would be directly impacted.

However, Apple has levers to offset the impact of tariffs:

  • It sells a broad range of products at different price points (iPhone 16e, iPhone 16, iPhone 16 Pro), and customers can trade down to a lower price point.
  • Most iPhones in the US are sold under installment plans, which reduces the direct impact of a price increase (a $15 monthly payment hike feels like much less than a $350 price increase), or with carrier subsidies, which pushes the tariff onto carriers like Verizon and T-Mobile.
  • Apple has some ability to shift the sourcing of US-bound products from countries with lower tariff rates such as India and Brazil and ask its manufacturers to absorb some of the impact. Furthermore, the Mac Pro is made entirely in the US already.
  • Apple can raise prices. Apple has shown it can raise prices by a bit without reducing demand before and furthermore, tariffs impact all of Apple’s competitors as well, so iPhones and Macs would not be relatively more expensive.

This is before considering the possibility that tariffs get lifted/reduced, or that Apple manages to secure exemptions as CEO Tim Cook did during Donald Trump’s first term.

Put together, while there is likely to be some impact, I expect the ultimate impact of tariffs on Apple’s profitability to be manageable and beyond that, expect Apple to continue making innovative new products and gain market share.

The second thing we are doing is to look for ways to increase the quality of the portfolio. In periods of panic, the stock market prioritizes short-term issues (COVID lockdowns, tariffs) ahead of long-term business prospects and especially management quality. This can be a great opportunity to purchase high-quality businesses at attractive prices. Prudently managed companies can use this opportunity to make acquisitions, conduct share repurchases, and gain market share from weaker competitors, resulting in a greater bounce-back when things inevitably recover.