Too often the business of investing is boiled down to math, with an overemphasis on models, spreadsheets and earnings forecasts. The issues wrought by this pandemic went far beyond any historical analogue to past plagues, falling markets and failing banks. Instead, existential questions about life, survival, and the new way forward for humanity became a more important piece of the investing puzzle. And as crass as it was to think about the markets amidst all the suffering, it was imperative to do so given our duty and responsibility to you.
If ever there was a time, this period underscored the immutable truth, and underlying contradiction, that though we are fundamental investors, there are times when the macro overwhelms the micro to such an extent that the “fundamentals” are irrelevant. No amount of company specific research could have predicted the onset of this virus and pandemic. There was no script for how to deal with a situation with so many unknowable and unpredictable variables. Instead, creativity, imagination and the ability to make considered decisions based on different sets of information became paramount. This crisis also bore out the validity of certain core tenets that we live by at Jericho, with the following (in no particular order) being the most relevant:
- First and foremost, preserve capital
- Have a fundamental view but be agnostic –there’s no shame in changing your mind
- Value liquidity and don’t be afraid to be aggressively nimble
- Above all stay humble
Coming into 2020, we were constructive on the markets as the growth to value rotation that closed the latter half of 2019 gave us good entry points to build certain positions on the long side. Even as late as the beginning of February, our gross and net exposures were at their upper bounds. This is not to say that we had yet to hear of the looming health crisis brewing in China. In fact, our emails show that our first internal discussion of a mysterious virus in Wuhan occurred on January 5th. As you know, we dedicate a significant amount of time and resources to Asia, and to China in particular, and in this case we picked upon events there relatively early. Though we had robust discussions amongst ourselves, we were not overly alarmed; information was still very scarce, and the virus progression seemed to be nascent. It was difficult to get a firm grasp on the situation at that point since the data was hard to come by and verify. We felt that the virus deserved to be monitored, but we did not make any wholesale changes to our portfolio at that time.
As the calendar progressed through January and into February, reports of this mysterious virus began to percolate more frequently both in the mainstream media and in sellside reports. The most common reaction was to draw analogies to past coronavirus outbreaks (SARS, MERS, H5N1) in an attempt to predict both disease progression and market reaction. By and large, most commentators shrugged it off and thought that the threat was worthy, but not noteworthy.
We had a similar initial reaction. But as we found out more from our contacts on the ground in China, it became increasingly clear to us that this one was not quite like the others. And our concern only grew more grave even as the markets’ complacency took prices higher. Though we did not (and could not) know with absolute certainty about the terrifying scale of this virus, we determined that preserving capital was the most prudent choice given the facts before us. To put it simply, the downside was too great compared to a relatively paltry reward. So armed with what we knew, we went from our upper limits of gross and net exposures to our lowest within a matter of days. We did this by selling those positions we felt most vulnerable to the effects of a pandemic, and shorting others most exposed to one. At the same time, we initiated or added to existing positions that in our mind would clearly benefit from trends that were being accelerated by changing consumer behavior brought on by the pandemic.
Managing a portfolio during a time like this is not dissimilar to clearing a minefield. You work your way through it inch by inch, or in this case, day by day. In the first quarter, almost everything was uncertain. No one could predict with any real accuracy how a pandemic would play out. Even today, the unknowns outweigh the known. In such an environment, we feel the best mindset to have is less certainty, more inquiry. We will continue to probe the ground to uncover what we can and carefully pick our way through to find a clear path, questioning each step along the way. And if facts dictate, we will keep an open mind, assess the situation and change course if necessary as we have in recent months.