Newsletter commentary Jan 2020

Simply put, there are a lot of concerns of the Coronavirus. There are two types of stock price declines: one is the decline that will not rise back, the other is the decline that will rise back. We believe that the current impact on the market is the second type. We are not epidemiologists, but the evolution of the disease, according to the incidence of the disease, the measures of quarantines, and the opinions of some experts, we think that this time as a whole, the measures have been taken in a more timely manner than SARS. But this time the virus is more contagious, more concealed, increases the difficulty of protection. However, the fatality rate is relatively low so far. Considering the lack of preparation and limited testing capacity in the previous period, taking Wuhan as an example, the daily testing capacity has risen rapidly, which has been greatly improved compared to 3 weeks ago. Yes, from the latest data, quarantine measures are working.

Compared to 2003, in addition to the characteristics of the virus, there are now several variables. First is that we now have communication methods such as WeChat and Douyin, which promote the transparency of information but also bring a lot of rumors or unverified half-truth, or opinions of non-professionals. They brought a lot of panics. Second is that the current prevention and control system is much more advanced than the previous case. The overall virus separation and identification system, and the group prevention and control system are very powerful. A good example is that there is a lot of complaint about the quality of rescue organizations online. From another perspective, the emergency preparation of any system cannot be good enough for extreme situations. For example, China 's daily mask production capacity is 20 million, accounting for 50% of the world's capacity. But can’t meet the demand of more than 1 billion people needing to wear a mask, and also encounter the Spring Festival holiday. According to the information of the Ministry of Industry and Information Technology, we have now recovered to 40% of production capacity, and we still have confidence in China's manufacturing capabilities. Third is that this time economic activity is a bit like a sudden brake. Wuhan is in China's transportation hub, and during the Spring Festival, it will soon involve the whole country and have a wider impact.

The impact on the economy can be divided into two types of prospects: First, the previous isolation measures have taken effect. It has been about 2 weeks since the holiday. Now it is about a couple of days to the 15th of the first month, which is the incubation period. Then, the virus carriers will be exposed, quarantined and treated. Other people would increase protection means, then the disease will be greatly relieved, and the impact on the economy will be relatively short and more controllable. Second, with the returning workers post the Spring Festival, the number of infections will be increased, making the economy shutdowns in a prolonged period. Inadequate workload will cause difficulties for some companies' operations and will have an impact on the overall supply chain. We believe that according to the current data and prevention and control, the probability of the first scenario is much greater than that of the second.

As the temperature rises, the virus will also weaken a lot. We think that it will be a matter of time to eventually defeat the virus. Then we can use many economic policies to alleviate the impact of this period and reduce the pressure on companies. From the experience of SARS and Brazil ’s Zika virus, this has a limited long-term impact on the economy and a limited impact on the market. Market fluctuations may leave traces on the daily and monthly lines, but they should have a limited impact on the quarterly lines. 

If the result of one thing is certain, why should we panic? The result of the Wuhan pneumonia epidemic is that we will get the final victory. There seems to be no doubt about this. The difference between everyone's prediction is a matter of time, one month, two months, or one quarter. Any DCF model that determines company value will assume 20 years or more of cash flow. Now there have been some changes in the cash flow for several months. What is the impact on long-term value? For the overall market, the underlying assets of the booming Chinese economy, the impact of such shocks on the overall stock index may be negligible. Of course, there will be some new winners and losers For example, SARS in 2003 contributed to the popularity of e-commerce. This time may speed up takeaways, online education, changes in movie distribution, and online office. Many industries that have been impacted, such as airport, aviation, and tourism, have experienced fast recovery. The impact of the epidemic is roughly the same as if you eat one less meal, without any impact on your health.  If you fall, you will rise again, so what are we panicking about?

For more than a year, we have been saying that one source of long-term excess returns is the ability to invest over time, and benefit from the long-term growth of excellent companies. If a company's long-term value has not been lost, the price drop is your chance to buy Instead of selling based on panic. It is often difficult to make money in the market because short-term fluctuations are too sensitive, leaving the market under various pressures and panics, and missing the long-term upward trend line. We have done statistics to check if we’ve missed those rally days and long-term returns would fall a lot. Now it is probably a similar situation. We suggest that if you were waiting to enter the market now, it may be a good opportunity. If you are already there, don't panic, this is a one-time shock. When you finish the exit, the decline may have been completed, and the rebound is also likely to be completed quickly.

Why does Buffett use a discount rate of about 10% in valuing a company, which is fixed? This is a tool to overcome his greed and fear. In 2008, 10% was used and at the 2007 peak time, 10% was also used. He was not driven by the environment but focused more on the assessment of cash flow. However, the stock flippers are often in the ups and downs of the game environment, pondering the next 10% move, tossing back and forth between the boom and gloom. Doing fewer of these games and it can be a lot less brain loss. That can extend Buffett's investment life, and many of his contemporaries are exhausted. But he can still buy Apple when he is almost 90 years old.

We checked our portfolio again, and we believe that none of the investment positions has their permanent value destroyed as a result of the Coronavirus while some of them may be affected in the short term. It is difficult to change the long-term habits of the consumption of these company products. There’s little impact on long-term value. Earn a few months less, and be winners. Consumer lifestyle and work habits will be adjusted in their favor.

Just like the masks mentioned earlier, we don't need to be in short supply because of snap-ups, and we don't need to sell stocks because of panic if you think that defeating the virus is certain.

In addition, I will invest in my fund, which I think is an opportunity.