Market Update: Ukraine War Volatility

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Market Update: Ukraine War Volatility

The war in Ukraine is creating serious human hardship and suffering not only in the region but around the world. And despite where your politics may land, we can probably all agree that a stock market sell-off is much less of a worry than what many people in Ukraine are currently dealing with.

Without diminishing the significant human cost of this situation, our job as stewards of your capital requires us to focus specifically on how all of this affects our portfolio, and that is the context for today’s article.

So far this year we have seen a roughly 13% peak to trough sell-off in the S&P 500, and a larger 20% or so peak to trough sell-off in the Nasdaq. These are significant moves in isolation, but when put into the context of historic drawdowns, they barely touch the yearly averages:

Firstly, during periods of increased volatility, such as this year, it helps to zoom out and look back at our writings during the initial months of the Covid-19 market shock when no one knew how long nor costly that crisis would be:

The key takeaway from these articles is that when the market appears most uncertain (war, pandemic, inflation, etc.), the most profitable strategy is to lengthen one’s time horizon – focusing on the underlying companies that we own and the cash flows we believe they can produce for us over a period of years, not days.

By doing so we avoid the common mistake that other market participants fall victim to during periods of significant volatility – shrinking their time horizon and simply extrapolating the current negative status quo far into the future (things are bad today, so they will be bad tomorrow), leading many investors to sell at the worst possible time.

By taking a long-term approach, volatility switches from a risk to an opportunity – allowing us to own more high-quality companies as they become cheaper. For evidence of this, you can look no further back than our performance coming out of the Covid-19 crash, in which we had the conviction to double down on some of our most sold-off names at the exact time that most market participants were reducing their exposure.

Secondly, while it is true that the current crisis in Ukraine will likely have a negative effect on supply chains, inflation, and global economic growth, it is equally true that the current crisis will at some point be resolved – as has been true of 100% of all past crises, which have all in retrospect proven to be good buying opportunities. We would argue that in three years’ time, we will likely be looking back at today as an equally good buying opportunity for our portfolio companies.

How can we be so confident? Because our portfolio is made up of high-quality companies that are uniquely positioned to weather economic storms. Whether or not a panicked market chooses to sell these companies down by 20%, 30%, even 50% in the short run will have no effect on the continued compounding of their underlying business fundamentals.

So, while it is true that our companies may be thrown out with the bathwater in the short term, it is also true that we do not view any of our companies as short-term trading vehicles. Instead, we own our companies because we want to be partners in what we expect to be outstanding long-term businesses. Nothing happening in the last few weeks has changed that.

As always, we thank you for your continued trust in the strategy, and there will be a longer discussion on performance in the Q1 letter which will go out in early April.

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