The Joseph Group

Thinking in Terms of Two Time Frames

March 25, 2020

Stepping Back from the Noise

As I type this, the Dow is up over 1,400 points and every single asset class on the tracking list I keep on my phone is green. It’s certainly nice to take a deep breath, but the rising market isn’t going to change one thing I planned to discuss in this email. The purpose of this note to step back from the day to day noise of markets, focus on the big picture, and share some of the things our Investment Strategy Team is thinking.

The Core Playbook

At the risk of echoing some of our past notes, we believe the best way to successfully navigate the financial impact of the coronavirus situation is to think in terms of two time frames simultaneously.

    • First, we need to acknowledge the reality we have never dealt with anything like this in modern economic times. There is no playbook or market history which can give us a road map here, and Congress along with state and local governments are creating policy as they go along. Having at least 3-6 months’ worth of cash and liquidity makes sense both to meet living expenses and provide emotional stability with regard to our finances.
    • Second, we need to acknowledge we will get through this and there will be opportunities created from the dislocations. Some of the stories of human ingenuity coming out of all of this are inspiring. Earlier today, Portfolio Manager Alex Durbin on our team mentioned in an email an automotive company who is building ventilators out of 3-D printed parts, battery packs, and fans which are currently used in seats for pickup trucks. Amazing. Also, as today’s market action (still up as I type) is illustrating, prices for stocks, bonds, etc. are changing rapidly from day to day. Some of those changes reflect shifts in fundamentals, but some of those changes also reflect computerized trading, liquidity challenges, and investor emotion. The “price” of the market today is not necessarily reflective of where things will be in one year and certainly not three years from now. (More on that later)

    Both time frames must be considered together – we cannot ignore the reality of the present situation nor can we ignore the reality of human desire to move through it and make things better.

    Cameron Mitchell and Sleeping

    On March 19, Columbus based restaurateur Cameron Mitchell was on CNBC and did a 10-minute interview I found fascinating. In the interview, Mitchell talked about meeting with his bankers on March 3rd and reporting a fantastic start to 2020 with same store sales up 7% and record profitability. Sixteen days later, by March 19th, Cameron Mitchell’s entire restaurant operation had been shut down and what was an operation of 4,500 people was down to six. Mitchell’s story certainly illustrated the shock many of us are feeling. Through the interview, Mitchell talked about the restaurant industry being vital to getting the economy back on track and the need for government support to get things relaunched when this is over. He also showed his belief in the American economy by saying “I built this company over the last 26 years from scratch and I can do it again.” Late in the interview, Mitchell said something we believe is key to investing in this environment – he said, “I put the company to sleep.” Notice he did say the company is asleep – it will wake up. As we are looking at our dual time frame, it is essential to separate the companies which will wake up and thrive from those that will remain in a slumber.

    The Dash for Cash and Conservative Portfolios

    This weekend I went into the grocery store and ran into a friend of mine who oversees investments for another investment advisory firm in town. I asked, “how are you holding up?” He responded, “we were down, but this week was awful as even our conservative investments got hit.” It was somewhat ironic we were having the conversation in front of empty shelves at the grocery store. When panic ensues, investors will sell anything they can to get “cash” without regard to value. We certainly saw that in markets last week as everything went down – even gold and high-quality bonds. One of the biggest challenges for portfolios in this type of panic environment is that diversification does not work. Investments which are supposed to “zig when the market zags” don’t work when panic makes everything zag. This type of environment can become a self-fulfilling prophecy as declining prices on everything reinforces the panic.

    The good news is that this type of environment does not last forever and one of the best solutions is time. This is one place were a good investment advisor and a dual time frame can provide logic in the face of emotion. The investment term for the “dash for cash” panic we are describing is called liquidity risk. In other words, what will happen to the price of an investment when everyone wants liquidity (i.e. cash)? The solution for managing liquidity risk goes back to our dual time horizon. When panic ensues, prices diverge from value and opportunity is created for patient investors. In this type of environment, our job is to be the patient investor who is looking for value, not to be the panicking investor.

    Lessons from the Past – Can You be Right Twice?

    Those of us who were managing portfolios during the 2008 global financial crisis have scars that were likely brought to the forefront during recent weeks. My own 2008 scars relate to the liquidity risk we just discussed. I have a friend, however, who has very different scars than I do and I talked to him this week. This friend was managing portfolios and sold most of his clients to cash and missed some of the biggest market declines in 2008. Sounds good right now, doesn’t it? The problem was, no one rang a bell when the market bottomed and this portfolio manager waited and waited for the signal to get back into the market. The signal of course never came and markets had a strong recovery before the economic data pointed to improvement. Although some of the downside was missed, so was much of the upside during the recovery.

    While we have made changes in portfolios, one reason we are not “going to cash” within an entire strategy is that we believe the markets will start to show improvement before things start to “feel” better from the virus. (And yes, it is easier to say this when I’m looking at a screen with the Dow up 1,400 points).

    What Are We Doing and Managing an Individual Stock Portfolio

    Our Storyboarding utilizing objective-based investing gives us a natural foundation for the dual time horizon which is the backdrop of this note. Because we do effective planning with our clients, we give our portfolios the ability to work proactively rather than reactively.

    The Joseph Group is unique from other advisors in a variety of ways. One way is that we manage an individual stock portfolio (Home Grown) in addition to asset allocation portfolios. Over the last week, I’ve taken a couple of times to drive around and think through questions like:

      • What companies still have cars in the parking lot?
      • What businesses are benefiting from people staying at home?
      • How is life likely to change once lock downs are over and what businesses will struggle and what businesses will thrive?

      The answers to these questions within our Investment Strategy Team have prompted a few changes in our stock portfolio as we shift capital to companies that are not only cheap, but companies who have the best change to survive and thrive. The thinking also guides us as we are looking at what we want to own in our asset allocation portfolios. Right now, leadership in stocks can be found in U.S. growth companies and emerging markets. Every day we have been going through our fund and ETF holdings and asking, do we still like what we own for the long-term? There are areas in the market which are cheap and could recover, but just because something is cheap does not mean it is the best investment opportunity.

      Another way we are different is that we are not “rebalancing back to a target.” I have heard other advisors talk about “getting clients back to their 60/40 objective.” Having a 60/40 portfolio is NOT an objective – saving for retirement is an objective – the allocation is just a tool to get there. I am confident we will be adding to stocks, high yield bonds and other attractively priced assets in the days and weeks ahead, but it is not because we are trying to keep a portfolio at a certain allocation target, it is because we are looking for the best way for clients to achieve their long-term goals.

      Thank you to our clients for the trust and confidence you have in us. Our team at The Joseph Group has been working tirelessly to live out our mission to help create great lives. We realize life has been disrupted for all of us, but we are so thankful to be in this together.