Rudyard Kipling once wrote, “If you can meet with Triumph and Disaster / And
treat those two impostors just the same,” which pretty poetically summarizes
my feelings about our past five quarters. From the early days of 2020 to the
very depths of our worst drawdown that troughed on March 23rd, we saw our
portfolio’s marks decline by nearly -50%. But then from thereon out to the end
of Q1 2021, a period that spans only one short year, it rallied over 175%.
Practitioners of Modern Portfolio Theory, of which most sophisticated
institutional investors are at least part-time, would downright faint at that
level of volatility. For they make one key assumption: volatility = risk.
Bluntly put, that is an analytical shortcut. It actually works serviceably
most of the time. Risky security issues are typically volatile! But not all
volatile securities are risky. And as a corollary, not all volatile
situations are risky.
That was what we were facing in March of 2020: a volatile situation erupting
from the first global pandemic in a hundred years. The key to decoding whether
it was truly risky or not was our collective response. Do our governments hem
and haw and wring their hands and ostrich their heads in the sand? Or do we
unleash the full forces of monetary and fiscal stimulus while pouring in
whatever resources it takes to develop vaccines in record shattering time?
Very early on, it became clear it would be the latter1. America
would respond. And with that insight, volatility became less risk and more
reward2.
Through it all, the composition of our portfolio was little
changed3. We earned our returns not through frantic trading nor
furtively chasing “what worked”, but simply by staying steadfast and
assertively increasing the ownership in our favorite, most familiar businesses
at increasing discounts. Buy more of the same when prices are low sounds
simple and unsexy. But I submit that it is not at all easy. It requires having
a depth of confidence that can only come from the accumulation of knowledge
and scars after following or owning a stock for years, which is needed to
buffet against the psychological forces that threaten to overwhelm rational
thought during periods of great tumult. It actually has nothing to do with any
pompous notion of courage –– sometimes the right course of action is to sell
in a proper panic if the situation warrants it –– and everything to do with,
again, to quote Kipling, keeping your head.
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1 However, if one mired oneself in political Twitterverse, one might very well have missed the forest for the trees given the rancid partisan rancor. Social media does not equal reality – a patently obvious statement but totally worth slapping on a sticky note on your desk.2 (Getting on my footnote soapbox here.) The development of four (and counting) effective vaccines against SARS-CoV-2 in less than a year is nothing short of a scientific miracle and a shining example of human ingenuity when facing a global crisis. Had COVID-19 emerged in, say, 1819, it would probably have slowly burned through the world population, mutating and spreading and exacting a multi-year death toll rivaling any of the great plagues in human history. We in America are indescribably fortunate to be first-in-line to be inoculated against this disease. But as of this writing, it is still raging in countries such as Brazil and India where access to vaccines remain extraordinarily scarce, so I cannot help but feel despondent toward those of us who reject vaccination because of, I dunno, political or conspiratorial or devil-may-care reasons while literally billions of people elsewhere would give anything to get vaccinated to escape humanitarian crises. It’s the epidemiological equivalent of the old admonishment, “don’t you know there are starving children in Africa?” when you waste food, except way more serious and way more sad.
3 Although you may recall my chagrin in my annual letter for not being sufficiently aggressive in investing in new names that I have long admired but never found the right valuation to enter into. It’s unclear whether or not our current returns would have been boosted if I did, but it’s more probable we missed out on steadier, longer term gains that those stocks would have provided in the coming years.
