(Image: Zen Buddha Silence, by Marilyn Barbone)
April 5, 2020
Here’s an excellent article by Rida Morwa on Seeking Alpha entitled, “Market Recovery: Sooner Than Most Expect”: https://tinyurl.com/w2wb9hn
Some points from Morwa’s article are worth highlighting:
The IHME (Institute of Health Metrics and Evaluation) currently predicts the peak number of daily deaths in the United States as occurring on April 12, 2020. The IHME also predicts peak resource usage by hospitals as happening on April 11, 2020. You can find the charts for both predictions here: https://covid19.healthdata.org/projections
The next question is: When can people start returning to work? If a treatment is developed that prevents moderate symptoms from becoming worse, or if there is much more widespread testing, then people may be able to start returning to work sooner than expected. There are many promising tests being developed, such as one by BD Integrated Diagnostic Solutions: https://tinyurl.com/uv2lp6b
These tests could identify who possibly has had a sub-clinical infection and developed immunity to the virus.
It’s likely that some people have already developed immunity. If this could be shown through much more widespread testing, some people could begin returning to a more normal life, including work.
Here’s a question and answer on the IHME website:
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Our model suggests that, with social distancing, the end of the first wave of the epidemic could occur by early June. The question of whether there will be a second wave of the epidemic will depend on what we do to avoid reintroducing COVID-19 into the population. By the end of the first wave of the epidemic, an estimated 97% of the population of the United States will still be susceptible to the disease and thus measures to avoid a second wave of the pandemic prior to vaccine availability will be necessary. Maintaining some of the social distancing measures could be supplemented or replaced by nation-wide efforts such as mass screening, contact tracing, and selective quarantine.
Widespread testing, contact tracing, and selective quarantine could replace social distancing.
THE STOCK MARKET
Morwa quotes Bob Farrell:
When all the experts and forecasts agree—something else is going to happen.
Value investor Howard Marks has made a similar point:
The thing I find most interesting about investing is how paradoxical it is: how often the things that seem most obvious—on which everyone agrees—turn out not to be true.
The vast majority of investors are bearish right now, and expect things to get worse. But if IHME is correct that the peak number of daily deaths in the U.S. will approximately be on April 12, 2020, and if much more widespread testing allows many people to begin returning to work, then the stock market recovery could indeed occur sooner than most investors currently expect. (Another catalyst for people resuming a more normal life would be the development of a treatment that keeps moderate symptoms from becoming worse.)
Stock market declines during the first quarter are rare because money is usually being invested during that time. However, when the stock market has declined during the first quarter, it has almost always recovered during the rest of the year. Morwa includes the following chart:
Source: Ryan Dettrick
Furthermore, insiders have been buying heavily. Morwa shows the following graph:
The last time insider buying outpaced selling by as large a ratio was 2009, which turned out to be a major stock market bottom. Morwa comments:
Insiders can be early, and if we examine the spikes in buying activity, they have often coincided with the initial bottom and not the retest. But they know the impact on their company’s activity and clearly they are not seeing cause for alarm that everyone else is. They also have a better gauge on the pulse of the economy and possible changes to lockdown scenarios by the administration. Their unbridled bullishness is possibly one indicator that suggests the bottom might be in or we won’t go much lower than the March lows.
Morwa points out that a spike in insider buying is usually quite close to the stock market bottom in terms of price, but is usually 3-4 months early in terms of timing. If that pattern holds, then now is an excellent time to buy, but it’s possible that there will be new lows by June or July.
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An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time. See the historical chart here: http://boolefund.com/best-performers-microcap-stocks/
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There are roughly 10-20 positions in the portfolio. The size of each position is determined by its rank. Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost). Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.
The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods. We also aim to outpace the Russell Microcap Index by at least 2% per year (net). The Boole Fund has low fees.
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