Torii® Asset Management

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So, what about COVID

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Globally for over a year, the COVID virus has consumed much of people’s attention as it has no bias. No matter your gender, faith, skin color, or political affiliation, it has most likely had a prominent impact on your lifestyle. 

Personal views on COVID are just that, personal. Every person has a unique amount of medical knowledge, information access, ability to interpret information, experience, and bias. The abundance of differing views is what makes COVID so confusing and disturbing to most. Most information is sketchy at best, even though officials and the media may come-off as all knowing. 

Since the last similar global outbreak was the Spanish flu epidemic of 1918, there is no one alive today with first-hand working knowledge to assist in dealing with COVID’s far-reaching uncertainty. A byproduct of this uncertainty can be seen in the markets as investors’ views and actions are being swayed by the constant change in COVID news reporting and accompanied policy changes by the government. After January, COVID vaccination optimism plateaued and the market more or less traded in a sideways fashion, but did gain on the back of the tremendous stimulus bill passing.

During the first quarter of 2021, the S&P 500 Index gained 5.8%, the NASDAQ Index gained 2.8%, the Russell 2000 Growth Index gained 4.8%, and the iShares Barclays 7-10 yr. Treasury Bond ETF (IEF) lost 5.9%.[1]

An interesting development during the quarter developed with the NASDAQ lagging behind most other indexes. During the quarter there was a shift towards smaller companies and in particular smaller value names. If this trend continues, it bodes well for the stock portion of our portfolios since that is my area of extreme expertise.

Even though COVID continues to be in the media spotlight, I believe it will be less so as we march forward. My best guess from the CDC (Centers for Disease Control and Prevention) graph below, is that COVID is going to lose its media, political, and public prominence.

The ultimate scare of any sickness is death. In the graph below, despite what you may hear otherwise, the right hand of the orange line clearly shows that from March 3/21 to April 4/21 of this year, the Daily Deaths 7-Day Moving Average shows a welcome decline. Yes, the Daily New Positives are up slightly, but this indicates to me that the population for whatever reason is able to recover from the virus. This is a big deal.

To further help the situation, the CDC now says that COVID-19 spreads less commonly through contact with contaminated surfaces. As can be seen with the markets and COVID statistics, a change is upon us. Of course, the media and others who benefit from a scared public will fight tooth and nail to keep fear alive.

Change is good. It provides for a new canvas for investing as the altered landscape evolves. As one is interpreting the change, it is necessary to critically estimate the durability of the change. Is it a fad, temporary, more long-term, or permanent? When change happens, there are generally three types of responses, the resistors, the wait and see crowd, and the ones who claim that it’s a new paradigm or “the new normal”.    

The resistors who preach “no way no how” are people set in their ways and are in one way or another heavily invested in the status quo. Due to the rapid change in technology and communications, resistors are prone to being left behind, but also hold an advantage of being correct in that permanent change is rare and has a long runway before it can be confirmed.

The wait and see crowd know that a change is happening, but realize that it may or may not be long-lasting and are not willing to pay the premium price that the market usually builds into these areas. These mature investors miss some of the high-risk growth of something new and exciting, but typically can sleep at night.

The new paradigm or “the new normal investors” are commonly impulsive and cannot pass on the “easy money” of something new, no matter how outlandish or unproven it may be. This is a very risky way to invest and most should not. In 2000, when the internet bubble craze came to an abrupt end, I personally know several professional investors and very intelligent doctors, lawyers, and business people that were virtually wiped-out due to their lack of market savvy and discipline.

Torii Asset Management’s success comes not from speculation, but from concentrating on the sound fundamentals of each company and the environment they operate, and not paying too much for their expected future success. In short, I purchase a company which provides a product or service with growing sales, has profitability which is increasing at a faster rate than their sales, is priced lower or in-line with their current and expected growth, and the market reflects growth by showing stock price performance in the top 40% of the market.

If your eyes glazed a little from my last passage, don’t fret, it was only a reminder of what I’m doing for you.

Today, I see my predictions from the January 2021 letter to you as valid. They are:

  1. The stock markets will end the year higher, but it is doubtful that returns will develop in a straight line.
  2. The Federal Reserve will continue their accommodative policy.
  3. Interest rates and inflation will be on the rise.
  4. The US dollar will weaken against other foreign currencies.
  5. The COVID-19 disruptions will continue until the second half of 2021. 
  6. The civil unrest we experienced in 2020 will abate.

In the near-term, as unorthodox as this sounds, I expect and hope for a sharp market drop. Market participants are becoming too accustomed to the greater fool theory of the market only going up, with disregard to economic and financial factors. A short-term correction should be expected and will be healthy for further future returns.

No one has a crystal ball, but I would like to reiterate, as of today, I continue to believe my #1 2021 prediction of the stock markets will end the year higher, but it is doubtful that returns will develop in a straight line. The following is a sample snapshot of what I see today.

Positives:

  1. The Federal Reserve continues to promote an accommodative policy
  2. COVID seems to be winding down
  3. Consumer spending appears to be on the upswing as the economy opens up
  4. Further government stimulus is on the table

Negatives:

  1. Interest rates and inflation are on the rise
  2. Government debt is ballooning
  3. The US dollar is weakening
  4. Defense companies are doing well

Black Swans – which are rarely welcomed:

  1. U.S Government debt is downgraded due to its recent sharp increase
  2. A sharp increase in geopolitical unrest or war

By definition, a Black Swan event is as surprising as seeing one, so do not take the expression as a formal prediction to act upon right now.

Using my aforementioned stock-picking criteria, I believe more opportunities will be seen in smaller value and commodity related issues as well as infrastructure stocks if the current administration is successful in their future stimulus efforts.

To our existing clients, I extend my sincere thanks for your business. You have our continued commitment to your success. To prospective clients, I invite you to come and grow with us.

Very truly yours,

Martin L. Yokosawa

[1] These returns are priced based and exclusive of dividend reinvestment.