Friday, Mar 13th 2020

🛡️ Recession-Proof Playbook


A recession is becoming increasingly likely, which means game time as an investor.

Today (March 12th) was a historic day. U.S. stocks fell 10%, one of the worst days in history, after a string of coronavirus-related updates (Europe travel ban, NBA suspension).  There's a real probability of recession, which is counter-intuitively the best time to be an investor. For an active manager like us, it's go time. 

Reminder how we're trading your capital: We're continuing to short the S&P 500 index to hedge your 20 Titan stocks and enable you to make some profits when the market declines.

Three things we want to ensure are clear:

1) Panic is seeping in, and markets tend to overshoot to the downside when this happens. If prior epidemic shocks are any indication, U.S. stocks could be up 10%+ in the next year (see table below).

2) That said, we think a recession (i.e. two consecutive quarters of negative GDP growth) could arise if this "double dip" phase keeps forcing industries to suspend near-term economic activity. Not fun, but recessions are part of the economic cycle. 

3) If a recession does occur, rest easy. You own 20 of the most recession-proof companies in the world, in our view. Their industry tailwinds, competitive advantages, and unit economics will survive a recession, and may even emerge stronger coming out of one.

What should you be doing? Healthwise: try not to touch your face. Financially: try not to touch your portfolio. If you have uninvested cash, you've lucked out big time: everything this year is on sale by ~25%. Even some of the best businesses in human history, like Amazon and Google. Take advantage of these major dips to get bargain-bin prices.

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Your Playbook##

1) Know that Stocks Tend to Rally after Epidemics

On average, U.S. stocks have risen 9% in the 6 months following each epidemic's onset, and 14% in the 1 year following the onset. We believe this precedent is part of the reason why in our latest survey of hedge fund investors, over ~70% said they believed markets would be up 1 year from now.

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It's impossible to predict whether COVID-19 will drive the same stock market trajectory as prior epidemic shocks, but there's a reason why this pattern tends to occur consistently. Epidemic shocks are always scary and unpredictable at first, but in reality tend to be one-time in nature. Don't try to time them.

2) Anticipate Future Headlines

The coronavirus outbreak will likely get worse before it gets better. As a long-term investor, you should expect more negative headlines to come:

  • Your favorite restaurant chain shutting down its stores
  • Your favorite getaway destination enacting a city-wide quarantine
  • Your favorite sports league cancelling all games for the rest of the season

Announcements like these are usually a surprise, so they come across as dramatic, ominous, and negative. But in reality, they are net positives for the long-term outlook: for each thing that gets cancelled, more and more Americans will be shocked out of complacency and nudged to take action.

The sooner that shock occurs, the sooner lifestyles change, and the sooner that happens, the sooner America can join China (and hopefully soon, Korea) at the plateau stage of the coronavirus case count curve:

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3) Do Not Try to Time the Market

Human beings are famously terrible at timing the markets. Even the world's best, most-resourced investors call it a fool's errand. Your friends probably understand this, yet still trade their own portfolios as if they are the single exception. Very unlikely.

It goes something like this: investors see a string of successive daily declines. They wait for what seems like an eternity (reality: a few weeks). Eventually, they capitulate to just make the near-term pain go away, ignoring or downplaying the long-term consequences doing so.

"I'm just getting on the sidelines until the fog clears." Anyone who says this is implicitly assuming they know where the market is going and exactly when things will bottom out. This is where most investors lose long-term compounded returns.

The markets have been brutal, we know. Long-term investors are being put to the test. But selling today means realizing losses that should turn to gains over time. It may be dark and cloudy today, but we see brighter skies ahead.

As always, let us know if you have any questions.

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