Memo - April 04, 2020
There is no new material information from past weeks' letters. Most news is noise for investors, where they would be better off ignoring it. However, there are a couple of things to consider.
The U.S. unemployment rate increased to 4.4 percent in March 2020. It is uncertain when the unemployment rate will reach its relative maxima. One thing is sure that until behaviors or consumers resumes to normal, economic destruction will continue.
"President Trump said federal guidance urging social distancing would stay in place through April 30 (Washington Post)." It's very uncertain if the federal guidance will extend.
There are two ways that the economy can resume back to normal. One is that people continue the economic activity, ignoring coronavirus. Ignoring coronavirus most likely will not occur because thousands of people will die, and the hospitals will run at under-capacity. Plus, even if you did open many businesses such as restaurants, consumers' behavior is not likely to resume back to normal.
The primary cure to resume consumers' activity back to normal will come from the medical industry. The greatest minds in the medical field are trying to find a solution. Companies such as Distributed Bio are making significant strides. Distributed Bio's current step is to hand over their therapeutic antibody to the U.S. military, a consortium from the Gates Foundation and some private groups. However, it is very uncertain how long finding a complete cure will take. It could take weeks to years.
Shiller PE ratio is at 23.49. Given the low-interest rates, the market is reasonably valued. If interest rates stay low, then stocks are cheap, given a five-plus year horizon.
Many companies, large and small, are seeking Federal Aid. Short-term financing in a coronavirus environment is equivalent to being underwater, and you are taking oxygen from other divers' oxygen tanks. The government certainly will worry about rising debt levels and another possible stimulus package.
Our point of view on the markets has not changed. Long-term value investors will find the value of a lifetime. However, investors have to be very selective about their picks. We like the saying from Peter Lynch, "buy a business so good that even an idiot can run because sooner or later, any idiot probably is going to run it."
Cordially,
Rojan Shrestha