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March 2020 Note to Clients


Given what last year brought to investors, we thought it would be worthwhile to highlight the note that we sent out to clients at the depths of the financial panic last March. Although it did not feel good at the time, we knew that the market environment in March was presenting us a great opportunity.


Subject: Avenue Portfolio Update – March 12th 2020

Date: Thursday, March 12, 2020

Avenue Portfolio Update:

We are again in one of those handful of days, over the course of a career investing in the stock market, where it is appropriate to ask the question, “why do we do this to ourselves?”

In the simplest of terms, this is what we know about investing:

  • To compound our savings at a higher rate of return than with bonds, we must own stocks.
  • Two thirds of our long-term return come from the reinvesting of dividends.
  • We will have bad markets, and we know it is hard to guess in advance when these days will happen.

Avenue’s strategy is built to deal with these realities.  Avenue’s stock market strategy is built on doing our best to own high quality businesses that generate income streams, which either are paid out as dividends or are re-invested in the businesses we own. We focus our research on the quality of the income that the company generates so that we can live through stressful times in the market.  It is essential to not pay too much for these investments.

In a hot bull market, like this January, we position the portfolio defensively.  When presented with extreme negativity, we can add money to our favourite investments. Buying in a bad market, like today, is the hardest part of the strategy. We must override our natural human instinct to protect ourselves and take advantage of times like this.

The alternative strategy is to buy on the way up and sell before the market crashes. There is always a temptation to over-trade, and you must be right with your decisions all the time.  The problem is we know this is not a successful long-term investing strategy because it requires guessing, not investing.

There is a paradox in our style of long-term patient investing. We are required to constantly reinvest our dividends back into the same type of investments. The fact these businesses are even cheaper in today’s stock market correction is absolutely better for our long-term returns, but it feels terrible at the time we are doing it.

So how did we get here and what is Avenue doing about it?

What is so unprecedented is the speed and severity of this stock market decline. We have had two, what we now call ‘Black Swan’ events in a matter of weeks.  The coronavirus is shutting down business and travel events globally, and Saudi Arabia decided to abandon OPEC after 47 years and begin an oil price war with Russia.

This is the first real bear market test of how regular retail investors using index funds would react in the age of social media.  What we experienced today was that every single stock in the stock market went down across the board and there was no place to hide. Canada, Europe, the United States, and Emerging Markets have all faced the largest stock market declines in decades.

Avenue has always stressed that we go out of our way to try and find stability and consistency in the underlying cash flow and earnings of our investments. 

What we are focusing on today is continuing to increase the quality of our investments so that we come out of this bear market with a greater portfolio of businesses. We have been trading more than normal over the past few weeks as we work relentlessly on the risk-management of our investments, while also high-grading our investments where we find opportunities.

Our view is that we believe the stock market has diverged from representing the underlying long-term value of our investments. In today’s market, quality investments and assets are being disregarded and punished just as severely as the broader markets.

Although the weeks and months ahead will continue to be volatile times, we continue to focus on patiently investing in businesses that come to a price level where we are comfortable owning them for the long term.

When the dust settles, we still face an economic landscape of exceptionally low interest rates and we also expect large central bank and fiscal stimulus over the coming months.  Our conclusion remains, where we have a longer time horizon, stocks still present the best long-term investing opportunities.

For Avenue clients that are retired and drawing income from their portfolios, periods such as this are why we have always stressed the importance of balancing stock market investments with owning high quality government and corporate bonds to draw from in our bond portfolio.

Please reach out to the Avenue team at any time with your questions and concerns as we continue to work hard through these volatile times.

Sincerely,

Your Avenue Team