Monthly Newsletter - March 2025 - Baskin Wealth Management

Thirteen Years and Thirteen Days

Someone (perhaps Mark Twain) said that history does not repeat itself, but it rhymes. Nowhere is this more true than in the stock market. The market drop following President Trump’s remarkable Liberation Day speech was brutal, with the major S&P 500 Index falling more than 5% in one day. However, this is hardly unique, or really, not even that unusual except for its speed. While corrections can be unnerving, they have historically been a normal part of investing. Since 1980, the S&P 500 has experienced a drop of 5% or more in 93% of calendar years and has experienced a drop of 10% or more in 47% or almost one in two calendar years.

When I sat down to write this essay I was tempted to explain in detail why I, and every mainstream economist you can find, thinks the tariffs rolled out on April 2^nd are a very bad idea. I will not do so, because if you are interested, it is very easy to find chapter and verse from many more eminent thinkers than me. Instead, in the spirit of “reuse and recycle” I have revisited an essay I wrote in 2016. Can anyone remember the market crash of 2016? I can’t either. What seemed traumatic at the moment faded into insignificance in less than a decade. (By the way, the S&P 500 returned 9.54% in 2016, not too bad!) Anyway, this is what I wrote back then.

This morning, I met with a couple who became our clients in January of 2003, now thirteen years ago. The wife had called me, crying, concerned that all of their savings were going to be lost due to the ongoing market crash which she was hearing about on TV and the internet. When they arrived this morning, her hands were red from wringing and her eyes were red as well. Her husband was bemused. He didn’t know what to tell his wife.

In preparation for the meeting I had worked up their file. Over the course of thirteen years their portfolio had produced a compounded return of 8.7% per annum, after fees and expenses. They had a cumulative return of over $1.5 million. Even last year, with all the craziness in the markets, they made a bit of money. This year, they are down about 6% in thirteen days.

In our meeting, I pointed out that over the last thirteen years there have been 365 thirteen-day periods. Many of them have been worse than the last thirteen days, but we cannot remember any of them. Over the course of time they have faded into insignificance. Or perhaps more accurately, can now be recognized as insignificant, because over thirteen years, no two-week period will really matter that much.

Readers of the emerging literature in behavioral economics will recognize the cognitive errors into which our client has fallen. Recency bias, loss aversion and confirmation bias (she is a chronic pessimist) have all led to her present condition. She has focused on thirteen days and forgotten thirteen years. I also told her this: Yes. I know it’s miserable, but these are the times when we all need to listen to our heads and ignore our hearts (and guts). The flight response is very deep-seated and we all have it hard-wired into our brains. Running away is the worst thing we could do. We saw it in 2008/09, and again during the start of the COVID crash – the only ones who ended up losing money were those who panicked. So yes, stay the course. It’s the hard thing but the right thing.

Back here in 2025, we are in terra incognita, where a giant experiment is about to take place. What happens when you apply discredited 19^th century notions about trade in the 21^st century? Do ideas from the age of steam when Britannia ruled the waves and America was an emerging power work in a world of robots, container ships and instantaneous communication? The markets are telling us this is a bad idea. We hope somebody is listening.

David Baskin

Chairman

How we are navigating tariffs

Almost exactly 5 years ago amidst the initial stages of the COVID-19 pandemic, I wrote a blog post about our framework for investing during a crisis. Today, we find ourselves 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 and 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 we are doing in response to the tariff situation.

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

Apple’s stock, for example, was down by 9% on April 3. 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.

Ernest Wong

Director of Research

Blog

Staying the Course: Why We Don’t Sell in Down Markets – March 12, 2025

Media Appearances

Barry Schwartz on BNN’s Market Call – March 3, 2025

Benjamin Klein on BNN’s The Open – Hot Picks in big tech – March 4, 2025

Ernest Wong on BNN’s The Open – Hot Picks in tariff defensive stocks – March 31, 2025

Long Term Investing Podcast

Compounding for 94 years – March 4, 2025

Navigating Tariff Threats – March 11, 2025

Constellation’s stellar year – March 25, 2025