The global death toll from Coronavirus is now over 2,800, with more than 83,000 cases reported. The virus has spread to every continent except Antarctica. US CDC announced cases with no known ties to an existing outbreak. The S&P 500 just recorded its quickest ever 10% correction. Every risk asset, including our portfolio is in significant drawdown.
It is inevitable that this infection is coming to a community near you. On how to avoid serious damage to your way of life, we have no insights. We personally are tracking the US CDC, WHO, prominent news sources, and a few unbiased Twitter handles. We will link to these at the bottom of this letter.
Though handicapping the odds of serious lifestyle disruption might be hard, finding out what the disruption looks like is relatively easy. Most of you have friends and family in Asia. Ask them. They are your best first-hand source.
People we know paint a grim picture. Shortages, school and work closures, families sent overseas to avoid infection, very little going out.
So prepare if you have to. And panic if you have to. After all what's the downside of a few extra supplies which might come handy during shortages? That it will all go waste? Or that you will look foolish? Seems like a good trade to us.
Surviving the portfolio drawdown, on the other hand, requires that we don't panic. Selling at these prices can only mean one of two things:
a) We time the market and buy the same businesses at lower prices.
b) Our portfolio companies will be permanently damaged so we stop owning them.
We don't have the skills for (a). And (b) is simply not true.
Businesses get permanently damaged in lots of different ways - competition, mismanagement, obsolescence etc. A virus outbreak is none of these things. It is a supply/demand shock. A huge shock no doubt, but not a permanent change in what humanity wants. Or what humanity produces.
Some businesses might die, mostly because they are unreasonably levered, need access to capital markets, or are simply uncompetitive on the margins. We don't own such businesses. Furthermore, we have zero portfolio leverage, so no one can force us to sell and raise cash.
We are sticking with common-sense, bottoms up analysis. When all this has passed, will humanity still need medicines, homes, and entertainment? Yes. Will our companies do a good job of producing these items? Yes. Is their capital structure such that they can survive a few quarters of losses? Yes. That's it.
And what about previous outbreaks?
The recent outbreaks - SARS in 2003, Swine Flu in 2009, MERS in 2013, Ebola in 2014, Zika in 20116, and Ebola once again in 2018, all had little effect on the stock markets. Markets globally went up in all but one of these instances.
Perhaps Coronavirus is worse than all these cases. Maybe it's as bad as the Spanish Flu, which affected one-fourths of the global population, and killed 3% of it. What did the market do back then? Not much. Major wars? Not much.
It is impossible to draw any conclusions here. Again, we will let business fundamentals guide us.
Could this be a buying opportunity?
Tasteless as it might seem, the answer is yes.
Supply chains worldwide have, over the years, become extremely reliant on China. After all, to sell large quantities of anything (phones, medicines, toys), to deliver on time, and to make money doing that, you need a large, reliable, and cheap producer of component pieces. China is that producer for most items. 90% of the world's pharma ingredients come from China. 25% of the phones are made in China. 80% of toys sold worldwide. The list of long.
Tariffs, increasing cost of labor, and China's own war on pollution, are already forcing companies world-wide to diversify these large, complex supply chains. The virus outbreak will simply exacerbate the trend. In many of these cases production will shift to India. The share of Indian companies in global supply chains is extremely small. So even minute shifts from China look massive for Indian toplines. If you make 3% of the world's chemicals and your neighbor 50%, even a 1% shift increases your opportunity by a third. This is only a high-level theme for now. The real work is going to be done company by company. And that's where we are spending all our time. We will write about specific positions when we have more to say.
Meanwhile, please unhesitatingly reach out if you feel the need.
And stay safe!
Rahul and Aniket.
A list of COVID-19 resources.
CDC updates: https://www.cdc.gov/coronavirus/2019-ncov/summary.html
WHO rolling updates: https://www.who.int/emergencies/diseases/novel-coronavirus-2019/events-as-they-happen
STAT news: https://www.statnews.com/tag/coronavirus/
BNO news updates: https://bnonews.com/index.php/2020/02/the-latest-coronavirus-cases/
Notes & Letters
A collection of our thoughts, views, and excerpts from our investor letters.