“… understanding cycles and having the emotional and financial wherewithal needed to live through them are essential ingredients in investment success.” – Howard Marks
The last few months have been difficult for many, to say the least. The economic, financial, and human tolls of this global pandemic have been severe. As investors, our eyes also turn towards the capital markets that have been on a roller coaster of ups and downs. We know emotionally driven markets are hypersensitive to any news supporting the argument for a bull or bear investment case. The uncertainty has been so heavy that it seems oddly like the experience of driving through a thick blanket of fog. For example, you cannot see very well in front of you. Suddenly you become awash with emotions from the lack of clarity about the road ahead. And to make matters worse, the backseat drivers in your vehicle start yelling instructions at you.
I think we can all agree that the worst thing to do in that situation is to panic. One of the first instincts that comes to mind in that scenario is to slow down and drive carefully. Immediately you drown out the noise and focus your attention on the task at hand.
Our investment and client teams have been focused on the task at hand. Shelter-in-place policies have driven many businesses to work remotely from home and QV is no exception. Modern technology allowed us to seamlessly transition to new working conditions and collaborate effectively when making investment decisions. Our Investment Committee continues to meet regularly (virtually of course) and conduct monthly risk management audits across our investment strategies. We remain committed to our bottom up focus in security selection and continue to scrutinize our portfolios for potential credit concerns and how the management teams of our businesses are navigating this challenging time.
Our investment philosophy that helps to preserve high quality portfolio characteristics keeps us focused on maintaining forward momentum throughout a market cycle. In aggregate, our capable management teams, durable franchises, balance sheet strength and long financial records combined in a diversified portfolio give us confidence that these investments will endure, which could be equivalent to a few extra meters of vision. In addition, our assessment of whether this opportunity set is value cheap or value expensive is a good indicator of the overall level of conservatism or aggressiveness across our strategies. It acts as the road markings that help guide us.
As corporate markets fell, the opportunity sets within our different strategies opened up and our investment teams took action. Our teams initiated on new ideas and added to existing positions at attractive valuations that we have wanted to buy for some time. The due diligence we conducted under clearer conditions helped maintain our objectivity and conviction during this emotional time. Our risk management audits highlighted attractive valuations, long-term growth and income characteristics that are rarely seen, and supported a shift in our conservatively positioned balanced strategies to one with more equity exposure. Our investment and client teams have been measurably increasing equities to a mix we believe represents a better level of risk/reward going forward. Since then markets have rebounded meaningfully, but our strategies stand ready to act again should our process direct us to.
Even through heavy fog, we highlight the necessary underlying belief that the road will continue. That it does not just suddenly end. Of course, there will be dips and turns, but the fog will eventually subside. This perspective is powerful. It ensures you do not reverse course. It is what keeps you moving. It is what gives us the conviction to know that as long as we act with prudence, stick to our investment philosophy and maintain a long time horizon, we can navigate through this fog of uncertainty and be much better off on the other side.