Legendary investor Seth Klarman once noted that the only things that a money manager can really control are its investment philosophy, investment process, and the client base. At Baskin Wealth Management we are truly blessed to have a client base that has a long-term orientation and does not overreact to short-term fluctuations. This mindset is absolutely critical in enabling our investment strategy of investing in high-quality companies for the long-term.
I have previously noted that a crisis is not the time to make significant changes to your portfolio and our research efforts throughout this time have reflected that. Our research during this time has been focused on the following two tasks, which are defensive in nature:
- Evaluate the impact of an extended shutdown on each stock we own and ensure that each company has the liquidity to survive. We have always valued a healthy balance sheet, and we had already considered the impact of a potential recession on each company before making an investment. Nonetheless, a government-mandated shutdown is unprecedented and most businesses simply do not run their daily operations thinking that business could be shut down for half a year.
- To the best of our ability, evaluate the long-term impact of COVID-19 and the shutdowns on the future prospects of the company, taking into consideration the potential of a deep recession and slowdown in consumer spending as well as lower interest rates and government assistance programs.
Most investors focus on buying and selling, but we recognize that monitoring what we already own is at least as important as what we buy and sell. Paying attention is an ongoing process and we are constantly updating our view with company updates, earnings calls, and phone calls with company management. Our Portfolio Management Committee also has a weekly meeting (now online, of course) to discuss any investment updates.
We spend very little time thinking about what the stock market will do over the next week or month. We know that we cannot predict this, much less control it. One of our core beliefs is that owning a portfolio of well-run market leaders operating in favorable industries will deliver decent results over time. This does not mean, however, that we stick our heads in the sand and stubbornly hold onto everything regardless of what happens. Betting on the Raptors to win the championship after Kawhi leaves is not being contrarian, it’s refusing to recognize that the situation has changed.[i] As a result of this process, we have made several changes to client portfolios which you may notice in your statements.
The last thing we are doing on the research side is to look for ways to position client portfolios for upside on the eventual and inevitable rebound in economic activity. The focus here will be on companies that we have already studied and understand, and did not invest in earlier due to valuation or other reasons, rather than buying cyclical companies that are currently down 60-70%. Our view is that companies that come through this crisis relatively unscathed or even stronger will be well positioned to gain share over those competitors that had to cut back or raise significant amounts of debt.
As usual, please contact your portfolio manager if you have any questions or would like to discuss any changes to your portfolio.
[i] Notwithstanding the excellent work by Nick Nurse and the rest of the team this season.