The economic picture continues to darken and most investment asset classes continue to flounder in lockstep. To say it's been a trying time as an investor would be akin to saying you might get wet in a monsoon. These last few weeks the bulls and many of the bears have been trying to find reasons why the market should stop going down, but the technical, fundamental and sentiment indicators remain burdensome.
I'm not an economist and am not going to pretend to know just how bad things will ultimately get, or how long they'll last that way. But I do trust my instincts and have the good sense to listen to people smarter than me who deign to share their views when asked. Times are tough. Times will get tougher. And, as I said several times over the last few months, be wary of thinking bad news is priced in, or that valuation is, in and of itself, a catalyst to move markets.
We're no longer debating the issue of recession, but rather the magnitude of said recession. We have a tendency to find false comfort in prior comparison. When something has "happened before", it's easier for us to wrap our minds around the eventualities and potentialities. That's been a huge part of this market correction. For most of us, the velocity, breadth and severity of this economic downturn is unprecedented. As a result, we have no safety net with which to react.
It would be one thing if investors were the only ones wading into uncharted waters; as an industry we've proven quite adept at adjusting to the paradigm du jour. But here's the rub...this is a generational problem that permeates every rung of our society.
Let's focus our attention on an industry near and dear to me, the information technology sector. Let's say, for argument sake, this recession is going to resemble the early 70s recession in magnitude [I think we have to go much further back to any reasonable comparable]. How many publicly traded technology companies even existed 35+ years ago? Those that did, for example IBM and Hewlett Packard, were entirely different constructs back then. And they're the exceptions to the rule. Think of a technology bellwether today and realize that, with near certainty, they haven't had to deal with an economic environment like the one we're currently enduring.
- The internet didn't exist the last time things were this tough
- Online advertising models are untested in a time of global deleveraging
- The cellphone industry has never had to deal with a period when worldwide GDP was as slow as we can reasonably expect in the next 6-12 months
- Semiconductors were a high growth cottage industry in the last slowdown of any magnitude
- Will the video game cycle really survive unscathed in a consumer-driven recession?
- ...and so on and so on
How will companies react? How will their employees handle the new reality? Will executives have the appreciation for history to make the tough decisions? There's a lot of talk about the strong getting stronger, but are they prepared to take truly dramatic measures?
I don't mean to pick on the technology industry, although I think it has unique challenges because of the relative newness and embedded sense of "growth over all else" that's driven the industry for the last few decades. But this systemic inexperience I'm referencing extends far and wide. Precious few management teams have handled this kind of global picture, and fewer still have navigated it successfully, in any industry.
What's the moral of the story? Uncertainty abounds. Logically you can't have any faith in forward estimates right now, particularly those over the next 6-12 months. So my advice? Don't try. Focus on companies that you believe are survivors, those that have a history of doing right by shareholders in good times and bad. Those who are targeting secular trends that will supersede a multiyear recession if you're patient enough. Understand that valuations as most of us have known them are irrelevant now. Right now it's about surviving. Unless you have to catch the bottom, don't try. Roughly 50% of the S&P500 is trading at 10x or less trailing GAAP earnings now, so just because something is "cheap" doesn't mean it's investable. Appreciate dividends and the power of compounding. REALLY appreciate a company's ability to generate cash flow, preferably sustainable FREE CASH FLOW. And recognize that anything you buy today, probably wll be cheaper tomorrow. These are humbling times, and we are all inexperienced denizens of this brave new world.
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