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A Marathon, Not a Sprint
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When will we be able to enjoy the simple things in life such as going out for a sit down dinner at a restaurant, talking to our friends at a house party or run in a race with more than 50 people? COVID-19, the invisible enemy, has certainly disrupted the global way of living.
We have had many pandemics. Some causes of pandemics have been eliminated, smallpox; some controlled, measles; and some still run rampant, yearly influenza. How will COVID-19 play out? Only time will tell, however, as medical and financial professionals, we have some expertise to forecast when and how this crisis might resolve. (We understand that drug and vaccine development outcomes are probabilistic).
In Part 1, we provided a synopsis on COVID-19, its start in China at the end of 2019; the market impact resulting in large corrections in global markets; the development of therapeutic treatments to attack the virus instead of playing defense until now; and the government’s predicament balancing saving lives versus disrupting its’ economies. We are four-plus months since discovering SARS-CoV-2. It’s looking more likely that the resolution of this COVID-19 crisis will be a marathon, not a sprint.
Part II: Scenario Analysis and Our Thoughts
As investors, we are interested in figuring out how the COVID-19 crisis will end and impact investment markets. The longer the disease takes to resolve, the greater the likely impact the disease will have on the global trade, unemployment rates and market returns. Businesses are starting to fail and many companies have furloughed or laid off their employees. The global economic machinery has never had a total disruption almost everywhere at the same time. It is also a reasonable statement to make that the longer the global economy stays disrupted, the more difficult it will be to restart the global ‘engine’. Not to be alarmist, but it is plausible that a protracted COVID-19 outbreak could lead to multiple industries and government failures and defaults leading to the next Global Depression. Fortunately, pandemic history over the past 100 years has normally resolved over months, some over years.
As Bayesian thinkers, it helps to create a scenario analysis as a framework to assign probability outcomes. The better we predict the COVID-19 outcome, the better we can construct the financial models we use to calculate the intrinsic value of individual companies. Our objective is to create a logical, systematic approach in navigating through the COVID-19 ‘black swan event’ as it continues to impact the investment markets.
Note the following discussion about the various scenarios are our conjectures. Please use at your own risk. We are not providing specific stock investment advice. Our goal is to demonstrate that we have developed a strategy to analyze the economic impact from COVID-19 in our investment portfolio. We provide a brief description of our three-step TOF COVID-19 Corporate Assessment Tool below. For a more detailed description, including using Disney as an example, please read the full article here.
Step 1: Assign Probability to Our COVID-19 Scenarios
We created four scenarios. We choose two key variables to differentiate the four scenarios: Time and Economic Impacts. In the first three scenarios, we assume that an effective treatment or vaccine will be developed, or that herd immunity develops from prior exposure. In the fourth scenario, we assume that COVID-19 will become a new endemic illness, similar to the yearly influenza. (COVID-19 would be classed differently from other coronavirus infections, a cause of the common cold, due to its much higher proclivity to cause serious and fatal illness).
Step 2: Rating COVID-19’s Corporate Impact
Physicians, especially our colleagues in Psychiatry, use assessment tools to help aid in diagnoses. Similarly, we developed the COVID-19 Corporate Assessment Tool, to aid our analysis on companies and business units during this crisis. This is a qualitative assessment tool and is used as an adjunct to the traditional financial model and analysis we use to elicit the intrinsic value of investable companies. As with many assessment tools simple, short and understandable are highly desirable traits.
Using the above Ratings Template as a key, we complete our COVID-19 Corporate Assessment Tool (below) for select companies we own or are researching that may be materially impacted by the crisis. The goals are two-fold: first, to make us think about a company’s abilities to survive and operate through this crisis; and second, to separate the company’s business units and ensure we have reasonable modeling assumptions.
Step 3: Adjusting Our Financial Models
Now that we have reviewed COVID-19’s possible impact. Do our assumptions used in valuation need to be changed? What is the new intrinsic value?
When significant new information is available that may affect our Scenario (Step 1) or Rating (Step 2) analyses, we would repeat our TOF Covid-19 Corporate Assessment Tool for our investments.
Our Thoughts on COVID-19
Our Panel Discussion: Dr. Lorne Porayko, Intensivist and Analyst, Dr. David Wingnean, Family Doctor and Analyst, and Tim McElvaine, Portfolio Manager.
What probability do you assign each of the Scenarios based on information as of today? Scenario I (SI) and Scenario II (SII)
Lorne- SI- 20%, SIIa-30%, SIIb-20%, SIII-30% and SIV-10%
I think that there is a 20% chance of a pharmacologic breakthrough and a V-shaped recovery. I speculate that there is a 30% chance of scenario 2A and a 20% chance of 2B, mostly because of logistical hurdles to scaling of a potential therapy, along with the inevitable political headwinds. Scenario 3 is less likely but possible, I assign 20%. Scenario 4 is the least likely but unfortunately remains possible: I gave it a 10% probability. I sincerely hope I am being overly pessimistic and that it is much less likely than 10%.
David- SI- 5%, SIIa- 20%, S IIb- 30%, SIII- 30%, SIV-15%.
I don’t see a silver bullet in current development. This makes me think Scenario 1 is unlikely. There are numerous promising vaccine candidates in clinical trials. However, there are some things in clinical development that you can not speed up, for instance, what are the longer-term side effects of the vaccine or how long will a vaccine work for? I think Scenario II and III are more likely to occur. The globe is throwing a lot of resources behind this problem. We are an advanced society compared to previous pandemics. We just need time to find an effective COVID-19 solution. Unfortunately, Scenario IV is also possible. We don’t have vaccines for any coronavirus even though there have been attempts, and some viruses have been insusceptible to vaccine development.
Tim- S1- 0%, SIIA-0%, SIIB- 80%, SIII-20%, SIV-0%
It is unrealistic to think everything gets back to normal by the end of summer. The path forward I suggest will be similar to my experience with a manual transmission car; it will consist of lurches, mostly forward but sometimes also backwards.
What are you most worried about?
Lorne- I think that the dispersion of potential economic outcomes is large and that there is an element of reflexivity at play here. By reflexivity, I mean that the longer the economic lockdown remains necessary, the more likely the worst case outcome (scenario 4) is bound to happen, due to a cascade of economic failure.
Put differently, there will come a 'tipping point' beyond which a recovery may be incomplete or very protracted. I do not believe we are there yet. If an effective and rapidly scalable pharmacologic therapy (or combination of therapies, like commonly used for HIV) for COVID-19 were to be discovered, I think that business would return to usual within months and certainly within the 8 month window of Scenario 1. 69 molecules are being tested in proper RCTs and 6 are in phase 3 trials. Although that is hopeful, I believe that if history is any guide, the therapies will only be partially effective and may involve large molecules, which are much more difficult to mass produce. Nevertheless, if even a partially effective therapeutic regimen is developed that keeps the majority of patients out of hospital and the ICU, that would be enough to allow businesses to go back to work. The other nuance is if herd immunity is possible or not. The 4 other coronaviruses that infect humans do not induce much of a durable immunologic response, and if this is the case with COVID-19, an effective and safe vaccine is unlikely and we may be stuck with a seasonal return of COVID-19 that will reduce productivity and strain healthcare systems for many years to come.
David- The world governments are racing to fight this crisis on many levels: financial impact, unemployment, treatment and vaccine research. Resources are being thrown and government decisions are being made that make me worried that unintended consequences may happen. The question is how severe. I am worried that we may see an ultra rare ‘double black swan event’. We are all hoping for the best, but also understand that this war is unprecedented in its speed and global nature of its spread.
Tim- Aside from the path of the virus, I suggest there are 4 things to keep an eye on:
Out of the 4 listed above, I worry most about political and social tensions. The first 3 we have dealt with before while the 4th is an unknown.
How do you think about investing in this environment?
Lorne- Corporate allocation behaviour will be influenced by this experience (assuming scenarios 1 or 2); however, I think that an austere mindset will fall by the wayside within a year or 2 (much like after the Great Financial Crisis in 2008) when greed overcomes fear. This is a pattern that seems to emerge again and again in history, with the exception of the Great Depression (akin to scenario 4).
As an investor, I think that planning for the worst probable outcome, while still cultivating optionality to the upside is the art and science of our craft. To do so requires flexibility with skepticism and the ability to balance priorities.
David- First priority is to figure out if the company will survive this crisis. Second, is to find investment opportunities that have emerged because of COVID-19 concerns that are short-term based. Since we are longer-term investors, we are discovering more investment opportunities now than prior to the crisis when markets were at all-time highs.
Tim- For value investors, it is about pricing and not timing. The future is of course uncertain. We determine what we think a company may be worth under a couple of scenarios, then look to invest at a discount to this appraisal value. This gives us a margin of safety and the bigger the margin of safety, the more attractive the investment.
Ending Thoughts: It will be a marathon not a sprint.
As of now, our team at the Osler Funds agree that the most likely scenario to play out for COVID-19 is Scenario II. Lorne is leaning that governments will be able to effectively ‘dance’ through this crisis; whereas, Tim strongly predicts we are heading towards SIIb, the Bad Dancer scenario. David’s forecast is in between.
Most likely, we will have to wait for an effective vaccine before we can all go back to normal, pre-COVID. Eighteen month is the most often cited timeline for vaccine approval. It may take another extra twelve months for full scale ramp up in production and delivery. In the meantime, most governments around the world will use a phase approach to open up their economies. In Canada, our strong healthcare system and rational government approach will incorporate a large public health component to screen for new cluster outbreaks and encourage social mitigation strategies to limit outbreaks to controllable ‘flare-ups’ instead of uncontrolled ‘fires’ requiring further lockdowns. Diagnostic testing will be important but has significant limitations due to the reactive nature of testing and the strain in securing adequate testing supplies. The good news is that global manufacturing of masks and other PPE equipment will ramp up sufficiently (due to positive economics and relative ease of manufacturing). We might see a new form of fashion, the ‘must have’ decorative masks.
Governments that chose to not or could not use prevention strategies (we call this the non-interventional approach) and instead allow for natural disease progression could be subjected to significant death rates (accounted for or not by official government numbers). Those that favour non-interventional approaches claim that we will not know the success of this method till a year later. They believe that the death rates will level out with herd immunity; whereas the countries that used a Hammer and Dance strategy will have early success, but infections are inevitable to hit the rest of society. Regardless of the government strategy deployed to fight this crisis, we believe that consumer confidence will be a vital variable to monitor before global economies can be reestablished successfully.
Admittedly, forecasting how the investment market will react in the next 12-36 months is more an educated guess than a precise calculation. We predict that if Scenario II plays out, a U or W shape recovery is likely. A possible differentiating variable between a U vs. W shape recovery will be how the large world economic players, such as China and US, are able to prevent future large waves of infection, requiring further widespread lockdown(s).
Fortunately, it is easier to predict the outcome of specific companies and sectors. Historically, major disruptions in the investment market is often the best time for investors to earn a superior investment return. We believe that COVID-19 will eventually become manageable, like all previous pandemics. However, it may take 18-36 months for people to resume normality (pre-COVID). Some companies will not survive the COVID-19 chasm, while a few will prosper. For example, select airlines and cruise ship companies with poor balance sheets, may face illiquidity and possible bankruptcies; many companies, like Disney, will survive, eliminate excess expenses and potentially become stronger post crisis; and a few companies, like Amazon, could strengthen during this crisis. (We own Amazon and Disney in the Osler Funds.) The new challenge for us is to find the companies that meet our previous stated investment requirements as value-based investors and are also able to survive and thrive through this crisis. We developed our screening tool to help us navigate through this crisis. We strive to protect our investments and find great investment opportunities during these unprecedented times. We are invested alongside our investors.
We wish all our readers, our best wishes to stay safe, healthy and strong through the COVID-19 crisis.
DW, LP and TM
Many government and health care leaders have compared the COVID-19 pandemic to a war against an invisible enemy. Healthcare workers are the frontline soldiers in this war. Like other conflicts, COVID-19 has its own fog of war. We are discovering new information about this novel coronavirus, SARS-CoV-2, on a frantic basis. Unfortunately, the quality of the information is generally poor and unreliable. Governments around the world are taking drastic steps to limit the damage this disease is having on its population and economies. COVID-19 has no current therapeutic options, therefore, governments have implemented various defensive and controversial strategies, such as total economic lockdowns and involuntary quarantines. As a global society, we are conducting hundreds of clinical trials to find therapeutic options to attack COVID-19, and take the war to the virus. Winston Churchill’s quote about World War II is aptly appropriate about the present state of our war against COVID-19. “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
We have watched in horror and astonishment at the speed and devastation that COVID-19, the disease, has brought to the world. SARS-COV-2 literally traveled around the world in 80 days resulting in massive worldwide lockdowns and unprecedented layoffs. Countries that were seasoned by SARS in 2003 and H1N1 in 2009 (like South Korea, Taiwan and Germany) were prepared and well-organized. It appears to have paid off as they have managed the COVID19 outbreak reasonably well. Those countries that did not or could not prepare properly are paying an enormous price in terms of lives lost and economic hardship in the coming days, weeks and months.
As value-focused investment analysts, one of our job mandates is to determine a company's intrinsic value. To perform any investment analysis, it is crucial to have a good model predicting the future cash flows of industries, sectors and companies. However, COVID19 has thrown the proverbial monkey wrench into the world’s economic machinery. There are unprecedented levels of uncertainty concerning whether the post-COVID world will be similar or vastly different than pre-COVID one and when our lives will go back to ‘normal’, if ever.
This is the first of a two part blog on COVID-19 and how to manage our investment decisions through this crisis.
Part 1: Framing the Problem and Solution for COVID-19, provides a synopsis on our current predicament. We review our understanding of COVID-19 and its health care impact. We summarize why and how COVID-19 is a devastating disease. We review possible therapeutic targets and highlight the key variables that a therapeutic option would require to become widely successful. While we are waiting for tools to fight the virus, governments around the world are using various defensive approaches to tackle this pandemic. Do we try to flatten the curve or should we let the natural disease progression of COVID-19 make its impact? We also will review the rationale why governments have used lockdowns and how governments may phase in a return to work strategy. The outcome of governments' defensive strategies to minimize the impact of COVID-19 is arguably the most significant social experiment in the past half century.
Part 2: Scenario Analysis and Our Thoughts, we create possible outcomes to this crisis, provide a tool to screen your investments and provide our thoughts and opinions. Please note that this blog article is not meant to provide in depth review of COVID-19 nor provide definitive analysis of the economic impact COVID-19 will have on the world economies. We are physicians and investment analysts with a good understanding of both. We believe our readers might be interested in our decision making process and some of our thoughts.
Part 1: Framing the COVID-19 Crisis and Possible Solutions
SARS-COV-2: A Novel Coronavirus
In December 2019, local health professionals in Wuhan tried to warn fellow physicians to inform their family and friends to take protective measures against a new ‘SARS coronavirus’ that came from Huanan Seafood Wholesale Market, a ‘wet market’. At the time, no one understood how this novel coronavirus was transmitted, but cases resulted in severe pneumonia and respiratory distress in patients and many healthcare workers. Almost a month later, once human-to-human spread had been established, China imposed a total lockdown in Wuhan and the rest of Hubei province. Wuhan is considered the manufacturing capital of China and is visited by many foreigners. Unfortunately, some foreigners were able to fly out of Wuhan and became the new index cases to countries all over the world, most notably in Iran and Italy.
The Perfect Storm: For a Viral Pandemic
For decades, healthcare and government experts have warned that a global pandemic would occur. The question that was unknowable was when. The investment markets outside of China were roaring to all time highs (S&P 500 reached its highest point on February 19, 2020), despite knowing China was in the midst of a lockdown in Wuhan. In part, the lack of investor concern was due to historical precedent that previous epidemics had only limited economic impact. Now two months since the all time market highs, we are in the midst of a worldwide pandemic with global government imposed lockdowns and investment markets experiencing significant corrections.
What makes SARS-COV-2 dangerous is the combination that it is ‘novel’ which means no one has developed an immunity to this virus through prior exposure. The virus is highly contagious with a reproduction rate, Ro, in excess of 2. Most importantly, there is evidence of asymptomatic spreaders which could be the source of a large number of unwitting superspreaders. This would explain why the virus has been able to transmit around the world so efficiently. In addition, 5% of those that are infected have disease that require critical care and a death rate of 1-2%. The great fear from COVID-19 is the combination of a high transmission rate (often from minimally symptomatic people) and its potential lethality, and the distinct possibility that in a single year the whole world is at risk of contracting this illness. A simple back of the envelope calculation produces truly mind blowing estimates. 7.6 billion world population multiplied by % infected multiplied by % death rate: Assuming 20% infection rate and death rate of 1% that would produce 15 million deaths (current total is 177k as of April 21, 2020). This number does not even begin to reflect total lives lost: because of overwhelmed resources many other patients who do not have a viral illness will certainly die from potentially treatable diseases. There is no convenient way to measure the indirect effects of COVID, but there’s little doubt they are enormous.
COVID-19: Efficient Transmission and Replication
The virus gains entry through the mucous membranes of the nose, throat or eyes by way of air droplets. Early reports were that the most common routes of transmissions are through fomites and aerosolization procedures (like intubation). However, more recent reports suggest that asymptomatic spreaders can transmit by simply talking too closely to other people, or even shouting or singing over 3 meters away inside a building such as a church. After the virus gains entry into humans, it binds onto the angiotensin-converting enzyme 2 (ACE2) receptors (present in type 2 pneumocytes in the lung, as well as in the gut, neural tissue and kidneys) and begins the process of replication.
The replication process and rapid spread to surrounding tissue induces common, non-distinct viral symptomatology in patients. For the majority (current estimate of 80%) of infected patients, COVID-19 symptoms range from no symptoms to what feels like a mild cold to a bad case of Influenza-Like-Illness (ILI). Recent reports that a significant number of patients also have difficulty with taste and smell and sometimes this is their only symptom. Due to its lack of distinguishing symptomatology, along with the fact that over 50% of patients do not even have a fever, a COVID-19 diagnosis is very difficult by clinical exam alone. Other disturbing facts are that once infected, patients suffering from severe illness may take up to 12 days before presenting to an ICU and the average ICU patient spends up to 2 weeks utilizing the ICU’s expensive, scarce resource.
The mechanism by which SARS-CoV2 infection causes death in patients despite receiving aggressive supportive care is not entirely clear; however, there are several hypotheses.
The first scenario is the frail, elderly patient with multiple comorbidities, often a resident in a nursing home. This patient is infected, develops COVID-19 associated pneumonia which leads to hypoxic respiratory failure. Because of the patients previously expressed wishes or due to the expectation of a short lifespan with or without COVID-19, the patient is not supported with mechanical ventilation and they die from hypoxia. Hypoxia eventually leads to bioenergetic failure at the subcellular level, multiorgan failure and death.
The second scenario is seen in healthy patients who are usually under 60. They contract COVID-19 and endure flu-like symptoms for 7-10 days. They then often improve for a few days and then rapidly deteriorate with high fever, profound hypoxia out of keeping with the severity of their pneumonia, kidney failure, circulatory shock, and an odd thrombophilic variation of DIC, a clotting disorder. Their lab tests demonstrate remarkably dysregulated systemic inflammation and activation of clotting throughout the body: this situation is often referred to as cytokine storm. Many organs fail in a cascade, despite supportive therapies such as invasive ventilation, anticoagulation, vasopressors, ECMO, and dialysis. This process escalates to unresuscitatable cardiac arrest.
A final, more rare, cause of mortality is primary cardiac arrest. The cause for this is even less well understood, but a rhythm disturbance induced by the virus is suspected in some patients, whereas myocarditis leading to cardiogenic has been reported in others.
Demographics: Targeting the Most Vulnerable
The data has been fairly consistent that COVID-19 is more fatal in patients that are over 70 and those with comorbidities, such as diabetes, hypertension, smokers, and autoimmune conditions. Experts believe that the COVID-19 death rate is in the 1-2% range, but data from the number of people who have died and the number of people who have been infected with COVID-19 is still a matter of great debate. We believe that the numerator (number of deaths) is more accurate than the denominator (total number of COVID-19 patients). If you look at official data, the Italian and UK death rate is at around 13% and the US death rate is 5.4%.
From John Hopskins University: https://coronavirus.jhu.edu/map.html
A positive PCR test is currently the only method to confirm a case of COVID-19. There has been a shortage of available PCR testing resulting in many countries placing restrictions on whom to test. In Canada, the priorities have been to test healthcare professionals, nursing home and hospital patients. Alberta recently expanded its testing to the general public to anyone meeting their online screening assessment.
Diagnostic testing is crucial to Public Health’s containment and mitigation strategies. With sufficient testing, it is possible to contain COVID-19 infection clusters before they result in community spreading. Testing is not without its challenges. Depending on the quality of the PCR test used, the sensitivity rate ranges from a low of 65% to a high of 95%. The world wide demand for PCR reagents has created repeated shortages and disruption in testing capability.
Another available test is a serology test used to detect COVID-19 antibodies. A positive serology test would signify that a patient had been infected and has developed some immunoprotection. Serology testing will be useful in deriving a better estimate on the total number of people infected COVID-19. In addition, people testing positive with serology could be immune protected from another COVID-19 infection and thus be ideal candidates to go back to work less encumbered.
Other Possible Diagnostics that are still not mainstream
CRISPR- a non PCR method is being researched as an alternative in the diagnosis of COVID-19 patients.
Lateral Flow- Canadia firm Sona Nanotech is trying to find biomarkers that would highly correlate with a COVID-19 infection. This would be analogous to detecting Beta-Hcg in urine pregnancy test.
Viral Load- COVID-19 viral loads are measured in some centers. There is research to detect if viral load corresponds to infectiousness or disease severity.
Possible Other Markers- We measure CD4 count in HIV patients to check for the immune status. We may find markers from COVID-19 patients that help with patient care, especially in the hospital setting.
COVID19 Therapeutic Options
There is currently no approved treatment for COVID-19. COVID-19 patients requiring hospitalization are managed with basic and advanced supportive measures. The current goal is to stabilize the patient and allow the patient’s own immune system to fight off the illness.
Scientists, hospitals and companies from around the world are conducting hundreds of clinical trials. Repurposing existing drugs, like hydroxycholorquine and colchicine, would be the quickest, easiest and cheapest to introduce into widespread use if effective. More recent data on Gilead’s Remdesivir is encouraging. Remdesivir is an IV drug used to prevent the replication of SARS-CoV-2. The study looked at 53 severely ill COVID-19 patients. 68% of the patients had improvement in oxygen-support status and the overall mortality rate was 13% over a median follow-up of 18 days. The mortality rate compared favourably to data from China 66% and UK ~50%. Although encouraging initial results, the small number of patients and the lack of control arm should temper our expectations. Nevertheless, there is also the possibility that further studies may demonstrate that Remdesivir is more effective in less ill patients or when it is given early in the disease process. (We are ALL desperately searching to find positive developments.)
COVID-19 is a worldwide problem. Remdesivir, even if proven effective, will not be a worldwide solution. The drug will be too expensive for many countries, the manufacturing process is difficult and time consuming and the fact it must be given intravenously makes the treatment logistically awkward, particularly in austere settings. The variables that are important to wide adoption include the therapy’s efficacy, tolerability, scalability and cost. This is a very high hurdle to achieve. On the positive side is that if the disease severity can be reduced by a treatment, herd immunity will theoretically be accelerated because the risk of contracting the illness will be more acceptable and the critical care resources will be less likely to be overwhelmed. In other words, a treatment that isn’t a cure but changes the disease into a nuisance rather than life-threatening would be enough to be a game-changer.
Vaccination has been the best solution to prevent pandemics. It is scalable, effective, inexpensive and tolerable, in most cases. The CDC has stated that it would take a minimum of 18 months, if everything went well. Historically, the quickest vaccine that was developed was the Mumps vaccination and that took four years to complete. There are added challenges in a COVID-19 vaccine: First, no coronavirus vaccine has been developed despite prior research and disease outbreaks. Second, there is the possibility of antibody-dependent enhancement (also called Vaccine-induced enhancement). In a prior coronavirus vaccine trial, vaccinated test subjects (rhesus monkeys) had more severe illness with future infections. Vaccine production is very expensive, time consuming and fraught with logistic obstacles (ie. availability of millions of fresh eggs!).
Breaking News: Sinovac Biotech, a Chinese company, released a scientific article announcing results of their purified inactivated SARS-CoV-2 virus vaccine candidate (PiCOVacc). The vaccine was able to confer complete protection in non-human primates against SARS-CoV-2 strains circulating worldwide by eliciting potent humoral responses devoid of immunopathology.
Government Response: Finding our Churchill
Governments are making difficult decisions based on imperfect information. Wrong decisions are inevitable. Nevertheless, our leaders must take deliberate, rational and decisive actions to prevent the Covid-19 crisis from overwhelming the front line, the hospitals and its workers, while maintaining hope and reassurance and deciding on when to and how to relaunch their economies. There is an interesting global experiment that is playing out. Most western countries have implemented varying degrees of containment, mitigation and lockdowns. A few, such as Brazil, Austria and Sweden, are wagering that natural herd immunity can be developed without proactive defensive interventions. Many undeveloped countries don’t have the necessary resources to provide an effective defensive strategy. Normally, the World Health Organization with the help of developed countries, will help the more vulnerable countries. But the COVID-19 war is everywhere and countries are thinking about their own battles first. The world is watching and hoping.
Operation: Hammer and the Dance
The Hammer: Rationale for Flattening the Curve
In the first wave of COVID-19 outbreaks around the world, countries have consistently found that an overwhelming number of patients presented with respiratory distress. With 5% of infected requiring critical care intervention, the rate limiting resources were hospital beds and respiratory support systems (oxygen, ventilators). The defensive strategy of containment and mitigation have proven to be effective in slowing down the total number of infections. When community spread was found, many countries chose a form of enforced lockdown, the hammer, to drive down the reproduction rate.
The Dance: Phasing in Back to Work
There is an enormous economic cost with the Hammer Maneuver. It is effective but not sustainable. Simply put, at some point the number of people dying from non-covid related diseases associated with the flattening the curve strategy will outnumber those that die from COVID-19. In addition, COVID-19 associated poverty will take its toll; the World Bank estimates that more humans may die of these indirect effects of the virus than from the disease itself! There is no proven plan on how and when to implement a return to work/normalcy strategy. Governments are forming task forces to help formulate battle plans. Implementing their own unique battle plan is the dance that governments will have to make, balancing a back to work strategy with the likelihood of further outbreaks. The goal is to avoid having to use the Hammer again.
Preventing Waves of Attack: A Fire Dance
It is reasonable to assume that when the dance has started that the number of new cases of infections will rise. Think of these new cases as embers with each the potential to start a new fire. If detected early and containment is achieved through public health measures, we can limit uncontrolled community transmission. Therefore, rapid,extensive testing and a strong effective public health system will be crucial. The other variable to watch is how quickly we ramp up work without dramatically increasing transmission. Social distancing, masks and workplace policies will be important in this respect.
Ending Part 1 with Hope
We tried to capture the COVID-19 crisis/war and the government's response/defense. Due to the fog of war and the unexpected strength of our foe, the world is suffering through the worst pandemic in modern history. We are very confident that we will eventually win the COVID-19 war. There is an unprecedented level of cooperation in the world today: scientists from all 6 continents are sharing data and furiously working to achieve a common goal. Software developers, engineers and architects are busy recruiting innovation and technology to help us adapt to the threat. Everyone can play a role. History has shown that humans have gone through pandemics, recovered and prospered. The pent up demand to go on holidays, go to a hockey game or see a great new movie is already building up within each one of us.
COVID-19 has disrupted the investment markets. Many companies will have significant distortions in their financials. An uncertain amount of businesses will fail and many jobs may be permanently lost. Some companies may be priced to fail but their underlying businesses are robust. These companies may represent significant investment opportunities. In our next blog, we will discuss our scenario analysis on how the COVID-19 war may come to a resolution. We will provide our thoughts on investing during both a medical and financial crisis.
Please feel free to email us or place a comment. We enjoy bantering to our readers and colleagues about our blog topics. We always learn by asking and listening. Please stay safe. We can all play our part because we are all in this together.
DW and LP
Leaving the Door Ajar
A day doesn’t pass by without at least one of my friends and colleagues asking me the question, “What are you doing in your portfolio now?”
Generally, I’m relieved to talk about any topic other than COVID-19, as it has utterly consumed my life, both inside and outside the hospital. I’d like to use this blog post as an opportunity to explain my answer to this question, which reminds me so much of Dr. Feynman’s “...leave the door to the unknown ajar” quote.
On the highest level, an investment portfolio is much like a farm. There are both times of plenty and famine. If not tended to in a thoughtful manner by the farmer/portfolio manager, the fields tend to fall into ruin. It is clear, at least to me, that we are in a historic famine right now.
Our fund (1) is fortunate in that we were prepared, in no small part due to luck and in part due to our value-driven investing process. In other words, we had trouble finding cheap and safe securities to buy and so we sat on a portfolio of mostly cash. Our largest position (other than cash) by some margin was Cambria’s TAIL ETF (2), which serves as a convenient source of cash at an awfully opportune time.
This isn’t to say that we haven’t suffered a bit. All of the equities we held prior to the end of February drew down and our energy holdings were truly taken out to the back of the shed. A combination of biologic contagion and a desperate oil price war between Saudi and the Russian Federation truly created a perfect storm. In aggregate, the portfolio dropped by just under 16% year to date and we are down about 12% since our inception in September 2019.
So much for how we were positioned before the market rout. How did we respond? (3)
First, as with all things, we did a lot of research. No one knows how the pandemic/oil price war will play out but we can do a bit of semi-quantitative scenario analysis and probabilistic decision-making.
For example, 3 different outcomes could be considered and a probability assigned to them:
1. “V” shaped recovery: the pandemic abruptly stops in the next few months (or sooner) due to a treatment, mass vaccination or a spontaneous biologic phenomenon (mutation, seasonality, etc) and Russia/Saudi agree to be rational. US has a moderate recession and recovers by mid-2021, China and SE Asia fare similarly. Europe muddles through somehow. Let’s assign an 80% chance of this becoming reality, entirely based on historic precedents. (4)
2. An “L” shaped (non) recovery: COVID gains momentum after pausing briefly in the summer months (much like Spanish ‘flu in 1918 summer), decimating the world’s population, health care systems and economies. A global depression ensues for many years. This dystopian-type outcome would be 10% likely.
3. Something between A and B; sort of a long grind. 10% likely.
Our first priority is safety. We systematically went through each security we owned and ‘stress tested’ them with an ‘upside/downside’ analysis. For each scenario, we use the probability weighting in both directions. Two of our sixteen holdings, Playa Hotels and Resorts (5) and Cenovus (6), looked vulnerable due to financial leverage. With the upside/downside ratio not being obviously favourable, we took a loss and redeployed the cash to positions with better risk:reward situations.
Our next priority is exploiting the opportunity. This is where a contrarian mindset comes in handy. For example, a first-order line of thinking might be “Retail is dead. All the malls are going to close permanently. Amazon will eat their lunch.” A second-order thought might be “It’s not likely they will all close. If so, who can survive and take advantage of a dramatically improved competitive landscape?”
Great capital allocators, strong balance sheets, network effects and economies of scale all play into creating a kind of ‘winner-takes-all’ dynamic in such financially stressful times. In scenario A, picking the winner can be extremely rewarding. In scenario C, one can expect a decent return that would probably eclipse most fixed income portfolios. Scenario B would be a disaster for almost any kind of portfolio composition other than cash and perhaps gold. (7)
A similar line of reasoning could be applied to airlines and energy, both incredibly unpopular industrial sectors these days. I will leave it up to you to decide if there are safe ways to invest there...
In conclusion, even though we have no special insight into what the future holds for us, we are excited about the opportunities this volatile market is creating for our fund. We are indeed peeking our heads through the door to the unknown.
Although preservation of capital is our top priority, we think that judiciously and incrementally deploying our large cash position into our strongest and most undervalued businesses may reap attractive returns for our unitholders. I believe that during crises like we are in now, active management pays off. When you own the entire market, you will own many businesses that will fail. If you can own the winners and have more than a modicum of patience, you are more likely to have a satisfactory result.
Tim, David and I wish your families will be safe, healthy and (eventually) prosperous through the remainder of 2020 and beyond.
P.s. I am putting more money into my pension right now and believe that this may be one of the best times to invest in a generation. If you would like to join me you can do so easily through this Wealthbar link:
Wealthbar accepts pension accounts, cash personal accounts, corporate, RRSP, TFSA and RESPs. Minimum investment is only $1000. You can do all the registration in the comfort of your home with no paperwork and no phone calls needed! (8)
1. 3P Financial is a division of McElvaine Investment Management Ltd.
2. This exchange-traded fund is meant to be used as a hedging instrument against high volatility. It holds intermediate duration US T-bills and some S&P500 put options. It has appreciated about 24% YTD and outperformed the TSX by about 46%.
3. It is in the best interest of the fund that I only discuss securities that we either have sold or have full positions in. Considering the current market environment, I hope the reader understands why I don’t mention many in this post!
4. There is no doubt that there are many unique features about this crisis; however, there is also no reason to believe that they should be different than any of the other ones. With no additional information you should assume the base rate. For example, both the Spanish flu and the Avian Flu pandemics were followed by protracted economic booms. Other important periods of austerity like WW2 were followed by long eras of prosperity. This is why I have assigned a high probability to scenario A. My colleague, David, is more pessimistic and would assign a 20% chance. He believes that COVID19 will impact society and economy over multiple years. We will both continue to use Bayesian thinking to update our investment decision processes.
5. PLYA trades on the NASDAQ
6. CVE trades on the TSX
7. I am not convinced gold is a reliable ‘disaster hedge’ other than the fact that many people believe it to be so. For a historical perspective please check out: https://awealthofcommonsense.com/2015/07/a-history-of-gold-returns/
8. Commissions, training commissions, management fees and expenses all may be associated with investment funds. Please read the offering memorandum before investing. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated.
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With a certain sense of dread and morbid fascination, I am watching a tragic natural disaster unfold: the emergence of the Coronavirus Disease 2019 (COVID-19). Despite some hope that ex-China, the virus will disappear, many public health gurus believe that the contagion is going to continue and that containment efforts will likely fail.
As a critical care physician, I have seen my share of epidemic infections: meningococcal outbreaks in university dorms, SARS, H1N1 ‘flu, just to mention a few. The thing that concerns me the most is the temporal pattern: these types of phenomena are occurring in cycles with shorter and shorter periods of respite in between. For example, H1N1 arose in 2009 and we have experienced 3 epidemic years since then.
The relatively low case fatality rate seems to be reassuring; however, this is a specious conclusion. A high level of mild/asymptomatic illness promotes global spread, hinders containment and prolongs the pandemic. A prevailing view is that the Coronavirus pandemic is of historic proportions and that it may induce social and economic downstream effects that will reverberate for years, perhaps even permanently. Although the full biologic and socioeconomic impacts will only be obvious in retrospect, it’s difficult to argue against understanding the virology as thoroughly as possible. Our financial and physiological welfare may depend on parsing reliable information, while encouraging rational decision-making and strategic preparation.
As of today, 58 countries, 5 continents and over 91,000 reported individuals have been affected directly by the virus. 3200 deaths have been reported although many epidemiologists believe the true number is far higher. To make matters worse for public health officials, minimally symptomatic ‘super-spreaders’ without fever easily cross borders, board flights and catch subway trains going to work without being detected. The daily case count outside China appears to have hit a lower inflection point. Public health officials have to deal with a moving target: the virus is mutating and its biological properties are changing, making containment and treatment development efforts all the more challenging. Hospitals in developed countries often run over capacity in normal times, making many wonder what will happen to non-COVID patients with treatable but urgent illnesses when that capacity is occupied by those stricken by the novel bug. Certain dystopian epidemiologists have suggested that COVID-19 is here to stay permanently and will wax and wane with the seasons as a ‘new normal’. Finally, many political barriers to pandemic counter-measures exist.
There are also some reassuring findings: the disease within China is decelerating and the death rate (initially as high as 3.5%) is dropping, although this may well be due to case recognition. COVID-19 outside of Wuhan may not be as deadly with an incidence of severe and critical illness of about 5-10% (compared to 20% in Wuhan) and a death rate of about 1% (3%). There are bench studies suggesting that over-expression of the ACE2 gene in ethnic Chinese and smokers may be responsible for the very high rate of critical illness and this might explain why fewer have died outside of China. Perhaps that the pandemic will slow down and even burn out by summertime. Only time will tell.
The economic toll exacted by the bug is more straightforward, yet almost as dire. Like most COVID-19 patients, the global economy was not particularly robust and showed early signs of faltering well before encountering the virus.
This satellite photo of the Eastern hemisphere graphically demonstrates N20 emissions which are strongly correlated with industrial activity:
Under ‘normal’ conditions, China is the brightest red part of the map by far. There is no question that commercial activity in the mainland has plummeted more abruptly than at any time in living memory.
Our hemisphere has also paid a price. Last week, North American indices dropped by double digit percentage points: the largest weekly drop since World War 2!
10-year Treasury yields tumbled to record lows, driven by the rush to perceived safety. Blue-chip stalwart companies AB InBev, Microsoft, Apple, Mastercard, HP and Paypal all issued ominous profit warnings. According to George Soros’ theory of reflexivity, systemic stress creates a negative feedback loop that accelerates the distress and erodes the intrinsic value of businesses. Companies with disrupted Chinese supply chains, for example, may not be able to access the capital markets for debt or equity financing critical for their operations.
If the pandemic fails to subside with the onset of the warmer seasons as many expect (hope), many businesses will be adversely affected by the isolation imposed by quarantine and ‘social distancing’ encouraged by the CDC: travel, airlines, cruise/leisure will all suffer and some will fail. Canada, being highly dependent on natural resources along with many developing nations, will endure further economic distress as demands for our exports drop off and our tourism industry gets choked.
A prominent local microbiologist made a prediction during the 2009 H1N1 outbreak to me: the way we currently live, shop and move around will change, and perhaps permanently. She felt that much of the contemporary direction in social and city planning was misguided from a biological perspective: the focus is on ‘densifying’ living space in order to encourage use of public transit and walkable communities. It doesn’t take much imagination to consider how popular large apartment complexes (with single elevators per tower), office buildings, sports stadiums, concerts, subways/trains/buses might be during an established pandemic. Taking this idea further, how do you think the market value of these risky spaces might fare in a ‘new normal’ scenario where coronavirus comes back to create havoc every winter? Even if an effective vaccine or treatment emerges, what about the effect of the emergence of the inevitable next novel pathogen?
Like any massive disruption, along with the negative come some positive consequences. I think that opportunities to reduce infectious risk through innovative technology will arise. If history is any guide, necessity is the mother of invention and the human race performs its best when its members cooperate to a common goal.
Another, more optimistic perspective is that after previous pandemics have peaked, stock markets have historically out-performed.
What Can We Do?
1. Maintain dry powder: Being a value investor, this was pretty straightforward for me. The accumulation of cash equivalents is just a product of the opportunity set. If the market is expensive, a lot of cash accumulates. When it’s cheap, the cash position depletes. Sometimes a hedging instrument can serve as a cash surrogate. There should always be a safety cushion for a rainy day/catastrophe. A side benefit: when the market tanks, I sleep well at night.
2. Make incremental moves: In other words, I like to buy and sell securities slowly, deliberately and in small chunks rather than going for broke. There’s a feeling of urgency in these situations that must be resisted.
3. Focus on quality: highly profitable and well financed businesses run by owner-operators with durable competitive advantages are quite uncommon and even more so if they are reasonably priced. This is the time to find them, buy them and hold them for a long time so it can compound its value.
4. Even when the sky is falling, think long-term: I do NOT try to outsmart short-term traders or the ‘algos’. I have no edge over them; they have enormous resources and will generally come out on top. Your biggest friend is time arbitrage: in other words, if one is willing to hold assets that are probably going to do nothing for a year or longer, you have a durable advantage over your professional (or even AI) competition who need performance today, this week, month or quarter to justify their existence.
5. Create a shopping list: do your research ahead of time. The better you understand a business’ fundamentals, the more conviction you will have to build a position as the share price falls and the more confidence you will have to hold it when it recovers, but hasn’t reached its intrinsic value.
As a value investor, I enjoy seeing the markets correct. For me, investing is like a treasure hunt, detective story and a marathon all rolled into one. On the other hand, there are more important things than making money. The human cost already born by the remarkably resourceful people of China is staggering. I feel deep sympathy for those directly impacted by the ravages of COVID-19, particularly in Wuhan. I haven’t the slightest idea which pandemic scenario will play out and I remain deeply concerned.
I sincerely hope you and your families remain safe and prosperous, even if trying times may be lying ahead.
Jeff Bezos, CEO and Founder of Amazon
This quote beautifully exemplifies the extraordinary disruptions that have occurred in Industries for the past twenty years and is projected to accelerate in the coming decades. Some industries such as the newspaper business are a shell of their former selves after the emergence and broad adoption of the Internet. Telecommunications and Media is currently undergoing its business transformation with the emergence of direct-to-consumer business model (Disney Plus, Netflix) and the rapid pace of cord cutting. Healthcare and Auto Industries disruptions are looming in the horizon. Big data and technology promises to transform how healthcare has traditionally been delivered. Driverless and electric vehicles may reshape the stodgy Energy and Auto Industries.
At the beginning of a new decade, it’s an appropriate time to reflect on some of the major themes that shaped the investment markets in the past. Such insight may offer clues on what may impact the future of investments: secular tailwinds that will drive up future cash flows, create competitive advantages and boost shareholder value. I have selected 10 themes that may substantially impact investment returns or create investment opportunities for the next decade.
You will find that my 2020 predictions on investment themes are derivatives of themes that affected the market in the past. Undoubtedly, something extraordinary—a so-called ‘Black Swan Event’-- may develop that is below or even off my radar. It will be the Osler Funds portfolio manager and analysts job as investment professionals to keep on top of investment trends. (We will keep our readers and investors updated with future blogs and commentaries). As you may know, we are value investors first and foremost. We try to find companies that trade below intrinsic value. One of the concerns that individual investors may have about value investing is that value investors miss out on the growth stocks. It is true that we are unlikely to invest in start-ups; however, our theme-based screening does pick up and forecast investment trends. We want to find growth-oriented companies at value investing prices, essentially GARP (growth at a reasonable price) or fallen angels investment strategies. We strive to protect our downside, but will keep on the lookout for the next FAANG type events.
Reflections: Hindsight is 2020
Two themes that drove stock returns in the past 20 years
Tech: Internet, A New Business Architecture
China: New Superpower
Two themes That Drove Investment Returns
There were many themes that drove investment return for the past 20 years, but the two mentioned are arguably two of the most important themes. Internet and other technological advances in the past twenty years created a new business architecture. China was the manufacturing muscle for the world’s economies with its large and inexpensive workforce. Together, these two themes drove the world towards a more globalized economy. There were very few Industries in the past two decades that were not significantly impacted by one or both these investment themes.
10 Themes That May Affect Investments for 2020 and Beyond
1. Tech: AI and Big Data- Is the Hype Real?
2. Peak Globalization
3. Renewable vs. Fossil Energy: The Battle of the Century
4. Space: The Final Frontier
5. Tech: Cloud Everywhere
Cloud computing has rapidly taken over the corporate IT culture. Cloud computing has the ability to provide on-demand computer resources that is scalable, more powerful and potentially cheaper. It’s growth has been exponential and will likely grow further as companies modernize their IT infrastructure to take full advantage of the significant computer resources and skills required to implement Artificial Intelligence applications and manage the workflow of a dynamic workforce.
6. Fintech: Banking At Your Fingertips
7. Environment, Social and Governance: The Movement
The movement that is transforming how corporation conduct business operation, resulting in a change in mindset and priorities for both investors and corporations. It‘s has been estimated that a quarter of all professionally managed assets use an ESG decision making process. The change in investing objectives has significantly impacted the Energy sector. Norway’s sovereign wealth fund, the world’s largest sovereign fund, is divesting out of fossil fuels even though Norway derives 20% of its economy from oil and gas production. How will climate change affect the airline, auto and beef industries?
8. Passive Investing: A Great Investment Tool but Not Without Risks.
9. Gig Economy: Redeploying the Workforce
10. Big Tech Companies Getting Bigger
Power of Humility
‘What the world needs is more geniuses with humility; there are so few of us left.’
American humorist/composer circa 1970 Oscar Levant (1)
I like to start off almost anything I write with a quote, above is my favourite on this topic.
What does humility really mean in this context? For the practical purpose of improving decision-making in both the practices of investing and medicine, I consider humility as being akin to intellectual honesty, or as a propensity to change one’s mind when presented with disconfirming information. In other words, a humble person may be very bright and talented (and realize this), yet fully ‘own’ their mistakes. This is not to be confused with modesty or self-deprecation.
Why even bother trying to be humble? Overconfidence, anchoring biases and cognitive dissonance all contribute to costly mistakes. Although we will all err and will continue to do so in the future, I believe you are more likely to make the same or similar mistakes repeatedly if you are not humble. With humility, you are less likely to take uncompensated risks.
How do I try to embrace humility? (Note: I wrote ‘try’...)
I’d like to finish up this blog post with a few random comments about 3P (4), The Osler Fund and the nascent New Year.
After several years of planning, negotiation and deal-making--while encountering many dead ends along the way-- we built a functioning turnkey solution specifically designed to help highly time-constrained professionals struggling to save enough for retirement. In other words, people just like us. Making the process user-friendly and yet still flexible enough were pain points we aimed to solve and have become our raison d'être.
When we started on this path, we knew that it wouldn’t be easy. In November 2018, I met a value investment guru I had been hoping to talk to for years: Tim McElvaine. I managed to persuade him to partner with him for our nascent value fund, The Osler Fund. David and I both deeply appreciate Tim’s 30 years of professional value investing experience; we are grateful to have his guidance.
We were fortunate enough to eventually find a compatible team behind a robo-advisor with an uber slick graphic user interface called Wealthbar, out of Vancouver. They have been great to work with and offer an attractive value for their service, particularly compared to the mega-bank/brokers we have been accustomed to (don’t get me started on that topic!). Even more, as we grow, the value added and costs are expected to become more attractive. It’s so nice to be able to deal with all the paperwork without picking up a pen or dealing with a post office, not to mention the real-time chat function that gets you dealing with a real person in seconds if there are any glitches.
On a personal note...2019 has been a long, tough year for my family. We have lost 2 family members and a close family friend, amongst other tragedies. To add to this grief, in my medical practice, I believe I saw more young people die or become neurologically devastated by the twin “F” plagues (‘flu and fentanyl) last year than the 10 years combined prior. Being a critical care physician tends to make you pretty tough, but this was still very difficult. This experience has reinforced the message from the ancient Persian proverb:
“This too, shall pass.”
In my interpretation, the proverb indicates that during hardship, loyalty and persistence will prevail. During the best of times, one must savour the moments, as they are ephemeral.
In stark contrast, I believe 2020 looks good for us. Our platform is working well and we have most of the bugs worked out in the pension onboarding process. The Osler Fund portfolio, in our opinion, is well prepared to exploit potential upside and limit downside in either a nasty correction/recession or an ongoing bull market. More on that in another, future blog post.
Remember to top up your TFSA to the new $6000/annum maximum (up from $5000 in 2019). That portion of your savings will be a boon later in life when tax deductions fall off! We offer TFSAs, RESPs, RRSPs, corporate accounts, personal cash accounts and pension accounts. I encourage you to sign up here:
You can easily transfer part or all your account from another institution or just put in some new money. The minimum is $1000. We appreciate your trust: please realize that every dollar you put in the account is invested alongside my own lifetime savings (including my wife’s) and I pay all the same fees that you do. I sleep well at night because I have faith in TOF’s risk-averse investment process, along with the fact that Wealthbar is backed by the giant institution CI Financial and the CIPF (5).
Finally, our survey results indicated that you wanted more commentaries and investment details. We are somewhat constrained by the securities regulations in what we can publish; however, starting next month I’m going to periodically send out a “Stock Focus” blog that uses one of our portfolio holdings as an example. David and I will send out other investing/personal finance oriented blog posts more frequently as well.
We wish you and your family the best of health and prosperity for 2020!
1. (yes, he’s joking…)
2. One can invert a thesis by asking oneself: “Why is this idea wrong?” Essentially, the same principle as a hypothesis.
3. This fascinating and probably underused tool can be explored further here: https://hbr.org/2007/09/performing-a-project-premortem
4. 3P Financial is a division of McElvaine Investment Management Ltd.
5. To read more about the protection of your hard-earned assets see: https://www.wealthbar.com/security
Does the Canadian election result make you feel anxious about your financial future?
Without wading into partisan politics (I am NOT going there), I think that we can agree that we can expect the following consequences:
At 3P Financial, we believe that it is urgent that Canadian professionals put their hard earned savings to work in a deliberate and tax efficient manner.
We offer you the opportunity to invest alongside us:
Don't forget that you can invest as little as $1000. If you're not sure, just put in a small amount and I'm sure we will gain your confidence over time.
We understand investors have different attitudes towards risk and as such, we have designed five portfolios to meet your needs, from very conservative to aggressive. Please check out our website.
Please If you would like to speak to one of our representatives, please send an email to email@example.com.
As of September 1, 2019, we are excited to officially launch The Osler Funds. It took a 1 ½ years of planning, preparation, partnership negotiations and legal work to develop an investment platform that, we believe, will help physicians and allied professionals in their financial and retirement planning.
Investing specialists can spend decades learning the tools and qualifications to become a designated expert. However, there are financial basics that anyone can learn and employ, relatively quickly, that may make you more financially literate and lead you to financial independence.
We will start with humble beginnings in the hope that our message will resonate with our colleagues and develop a utility for our readers. We aim to provide blog posting on a monthly to quarterly basis. Feel free to forward this blog to a fellow colleague or interested friend. We encourage questions, comments and feedback.
In today’s blog, I will discuss the one financial advice that almost all advisors will agree with: Spend less than you make. It's very simple in theory, but not always the easiest advice to follow. There is a similar medical condition that is analogous: Obesity. Eat less and exercise more to maintain a healthy weight. Again, simple in theory, but not the easiest advice to follow.
One of the biggest benefits you receive after the completion of your medical degree and finish your medical training, is your ability to generate a decent salary. After years of living modestly, physicians transition from an indebted student to the more glamorous lifestyle of a professional. Your older colleagues are living in big houses, driving nice cars and going away to foreign destinations for holidays. It becomes very easy for new physicians to assume a lifestyle and create a spending habit that is beyond their earnings capabilities. This will ultimately lead to a large debt load and create a financial stress/burden that many of our colleagues may have experienced.
Debt is not all bad. What is a good debt and bad debt? In general, debt that will increase your long term earnings capabilities (e.g. med school and residency) or debt that is a lifestyle necessity (e.g. a home, a method of transportation) is justified and a good debt. However, is buying a $500k house or a $1.5 million dollar house advisable? Is that sports car you always wanted something that you can reward yourself with after years of schooling? These are decisions that are made easier once you become more financially literate.
As physicians, we understand that our basal metabolism slows as we age. Eating a healthy well balanced diet and supplementing with modest amounts of strenuous daily physical activity should be a recipe for a better lifestyle. Yet, why is a large segment of our population now overweight, including physicians. According to the 2007 Physicians Health Study, 40% of the 19,000 doctors were overweight and 23% were obese (Physician Obesity The Tipping Point: Glob Adv Health Med. 2014 Nov; 3(6): 8-10)
It's not a wild statement that the “Obesity” epidemic and the “Debt” epidemic are analogous. Too much easily available calories is a major contributor to obesity and poor physical health. Too much easily available debt is a major contributor to poor financial health.
The first step in treating any disease is to recognize that you have that disease. The same goes with financial health. The first step in treating your financial health is knowing your spending habits. Do you have financial discipline? What is your debt load and can you afford the interest payments? In turn, for eating and exercise: Do you have a healthy diet? Are you gaining weight? And if so, does that bother you?
The second step is to create a game plan and develop reasonable goals. For a 30 year-old Internist, her goal is to have $1 million in assets by 40. First, she should create a simple budget or use her bank and investment statements as a guideline to what she is capable of saving yearly. If she is making $250k per year and spending $100k on food, debt payments and other expenses. After taxes of 40%, she would generate excess cash or savings of $50k ($250k-$100k= $150k, $250 * 40%= 100k in taxes, $150k-$100k=$50k yearly savings). $50k for 10 years would get her $500k. She would need to generate approximately 10% per year in investment returns over those 10 years to meet her $1 million financial target at the age of 40. Her financial game plan is reasonable and might be achievable with solid investment decisions.
If you are not financially experienced or uncertain that your financial game plan is realistic; it’s a good idea to talk to a financial advisor or someone you trust that has financial experience. Similarly, if you want to lose weight or maintain a certain fitness level and can not do so, maybe it's time to join an exercise group or talk to a fitness and/or diet advisors.
When you were an undergrad or a med student, you created a game plan on how to enter medical school or enter a residency, respectively. You knew the courses you had to take, the volunteer work required and the relationships that needed to be cultivated to secure your references. As you are reading this blog, have you thought about what your financial goals are for 2020 and 2030? Will you meet your financial goals for 2020? Similarly, did you set a health goal for 2020 and 2030?
After long hours training through med school and residency, I came to an important conclusion. If you are going to work hard for your money, it’s a good idea to make your money work hard for you. As physicians, you are fortunate to have a stable income. To become financially independent is much simpler for physicians than the general public. If you focus on limiting your spending to less than what you earn, your chance of financial independence is extremely high. However, game plans can be easy to create and not always easy to implement and achieve.
In future blogs, Lorne and I will discuss topics that are focused on financial matters that may be of interest to our medical colleagues. Our goal is to assist our readers in becoming more financially literate and better investors. We know that you work hard for your money. It's time to make your money work for you. It’s time to be financially independent.
If you have questions, comments or suggestions, please feel free to email one of us.
Skin in the Game
“Never, ever think about something else when you should be thinking about the power of incentives.”