In the face of the rapidly developing coronavirus crisis, I wrote four memos in March, setting a personal record. Because of the lack of available data, the task is relatively simple, because it means I don't need to do much research to write, mainly to provide a personal point of view.

In the first of four memos, "Nobody Knows Ⅱ," I described the distinction made by Harvard epidemiologist Marc Lipsitch. He says there are (a) facts, (b) well-founded inferences from analogies with other viruses, and (c) opinions or speculations. At that point, I think scientists tried to make informed speculations, but there was not enough data about novel coronavirus to turn those inferences into reality. I also specifically point out that anything a non-scientist says is probably just a guess.

Similarly, I wrote the following words to a colleague at Oak Capital last week:"these days everyone has the same data about the current situation and everyone is equally ignorant about the future. "This sentence almost sums up the current situation.

Most of what we have today are opinions, and most of them tend to be either optimistic or pessimistic. The difference between the two is huge: if you read only optimistic articles, you will think that the virus will soon be wiped out and the economy will return to health, if you only read pessimistic articles, you will think that we are all screwed.

In my opinion, the difference between positive and negative views held by most people is likely to be mainly due to their inherent biases and the data points they choose to value. Future scenarios contain a large number of variables: there are even more today than ever before. It is relatively easy to create a spreadsheet that lists many factors that affect the future and rates them as likely to get better or worse.

But the plus or minus sum alone won't tell you whether the future is good or bad. The core is to figure out which factor will be the most influential. This is often the place where optimism or pessimism and prejudice occur.

Optimists are encouraged by the bright prospects of positive data points, while pessimists are depressed by the possibility of bad prospects for negative data points. Even if their work is based on the same spreadsheet, they have the same elements and ratings.

Things like "knowing the future" are rare. But usually the future will be very similar to the past. This time, I think we will agree that the short-term future is unlikely to look like it was a year ago. As I did last week on "where are you going" (WhichWay Now?)We must think about our situation "in the face of unprecedented uncertainty and a complete lack of guidance from similar events in the past".

Although the future is always uncertain, the current uncertainty is greater than usual: the probability distribution of future events is wider and thicker. In fact, few people have experienced the possible negative effects (and possibly positive ones) in their lifetime. What we have is mainly subjective opinions and interpretations.

I don't think I might have a superior opinion on the outlook for the virus and its impact on the economy, the success of Fed / government action, or the rise and fall of oil prices. I sorted out and discussed the possibilities of these topics in my memo in March, but I can't be a better predictor than anyone else.

However, I do hope to help you by discussing how you can think about your behavior in the current context.That's my theme today. Before I give the conclusions I have reached, I would like to summarize the relevant points in the March memo. As you will see, I wrote two memos for Oaktree clients only in mid-March, although one of them was available on our website a few days later. (let's begin (the emphasis is added to the original text):

No one knows Ⅱ (Nobody Knows Ⅱ)-March 3rd

At this point we are still in the early stages of the crisis, and only a few cases have been reported in North America. We are also in the early stages of the recession and market response process. In fact, the S & P 500 is down only 13% from its level on February 19. In my first memo on the crisis, I raised some topics and went back to discuss them in the weeks after that.

These days, people keep asking me if now is the best time to buy (the time). My answer is more subtle: this may be a time. We cannot identify a unique point in time to buy. For example, the only thing we can confirm today is that the absolute value of the stock price is much lower than it was two weeks ago.

Buy, sell or hold? I think it's okay to buy some, because things are getting cheaper. But there is no reasonable reason to spend all your cash, because we don't know how bad things will get in the future. What I'm going to do is figure out how much I want to invest at the bottom of the market-- no matter when-- and spend some of it today.

The stock may reverse all the way north, and you will be glad you bought some. Or they may continue to fall, in which case you still have the money (and hopefully an order) to buy more. This is to accept people's lives where they don't know what the future will be like.

But no one can tell you that now is the best time to buy. No one knows.

An update (for Oaktree customers only)-March 12

A week and a half later, after we canceled the Oak Capital meeting and replaced it with a live broadcast, Nancy and I began the still-ongoing social distance prevention and control measures. After the S & P 500 fell by 29%, I highlighted a reverse theme and concluded that the damage caused had created a clear opportunity:

As always, it is important to be awake about the investment environment and act like a contrarian. For years, investors thought the market was good, and we believed in Oaktree that asset prices were high and the market showed risk-taking. That's what keeps us cautious. Now there is no doubt that the "perfect decade" is over and asset prices have been cut. The great contrarian Warren ∙ Buffett famously said: he likes hamburgers and eats more hamburgers when they are on sale.

The frequency with which I write a memo almost every quarter is dwarfed by Doug Kass's output of at least one article a day. His notes on March 11 had a great title: "when the time to buy comes, you won't want to buy it." "the best time to buy often comes when no one else is willing to buy; other people's reluctance to buy often makes securities cheaper. But the factors that make others reluctant to buy can also affect you. Contrarian investors may rule out the impact of these emotions on firm buying, even if it is not easy to do so.

As I said, "all great investments begin with discomfort." "one of the things we know is that there is a huge discomfort in the current market.

Recent updates:Available to customers on March 19 and published on the website on March 24

The memo comes at a time when the S & P 500 is down 29% and will hit a low (down 34%) on March 23 in a few days. The panic we observed, and our heavy buying that week, made me take a firmer tone on the buying point of view. My position is that it is a mistake to wait for a definite bottom before the bottom appears.

What do we know? There is not much except that asset prices have fallen significantly, the ability of asset holders to hold calmly has disappeared, and active selling is accelerating. I'm going to briefly summarize my point-because there's nothing complicated to say:

• The "bottom" is the day before the recovery begins. So it is never possible to know when it has gone to the end. Oaktree explicitly refuses to wait for the bottom; we buy when we can evaluate the value as cheap.

• Although it is impossible to say that the bottom is coming, the conditions for bargains in the market are emerging.

• Based on the falling prices and selling we have seen so far, I believe this is a good time to invest, although of course it may not prove to be the best time.

• No one can tell you that you should use up all your money today. But again, no one can tell you that you shouldn't spend a penny.

• The more you want to get potential gains and ignore paper losses, the more you should invest at this time. On the other hand, the more you care about protecting assets from paper losses during the period and the chances of losing profits, the less you should invest.

But is there really an argument for not investing at all? In my opinion, it is not enough to argue that we are not necessarily at the bottom.

Which way are you going? --March 31st

The Fed / Treasury's statement on the response to economic difficulties appeared on March 24, and the market immediately understood that it was likely to succeed. By the time the project was implemented, the stock market had rebounded on March 24-26, producing its best three-day earnings since the 1930s, reducing the S & P 500's decline to 24%.

Market prices of assets have responded to events and prospects (at a very micro level, I feel that last week's rebound reflects too much optimism, but this is just my feeling). I would say that asset pricing on Friday is reasonable for an optimistic scenario, but there is not enough room for worsening news. So my response to all the above discussion is to expect a fall in asset prices.You may or may not think that there is still time to be more defensive before potential negative events unfold. But the most important thing is to be prepared to face and take advantage of the decline.

My information in the four memos is not consistent, but there are some common ideas.

• My observation has ups and downs, especially when the price of securities fluctuates sharply.

• I have never urged to sell, because I think a large part of the loss has been caused. In other words, it may be too late to reduce the risk of the portfolio.

• I discussed the reasonableness of buying-- to some extent-- mainly because securities have become cheaper.

• I never said that this is the best time to buy (or not right now). I encourage an incremental approach, rather than buying full positions or shorting them completely.

• The most consistent observation should be that it would be a mistake to buy nothing at the new low price.

The vague and changing information summarized above has no specific conclusions, leaving those seeking clear advice unsatisfied. However,In my opinion, there is no room for certainty in investment, and it is more so than ever.

Portfolio allocation

One of the benefits I get from writing memos is that the more time I spend studying a topic in the memo, the more focused it becomes. So the four memos in March gave me a good opportunity to think about what these events mean for investment behavior. I am glad to tell you that I have come to a conclusion on this topic. I have a strong feeling that this conclusion is correct. But I also fully believe that this conclusion may be revised in the future. (laying the groundwork: some of what I have said in the past will be repeated in the following paragraphs. )

In recent years, I have come to believe that the most important task for fund managers in the medium term is not to decide on stocks and bonds, domestic and overseas, developed and developing countries, large and small market capitalization, high quality and low quality, or asset allocation between growth stocks and value stocks. Nor is it about choosing strategies, funds and fund managers.The most important job is to strike the right balance between offense and defense.If you make mistakes offensively / defensively, other judgments don't help much. If your offense / defense is correct, other judgments will come naturally.

One way to think about the balance between offense and defense is to consider the "twin risks" that investors face every day: the risk of losing money and the risk of missing opportunities.At least in theory, you can eliminate one of them, but not both. Even eliminating one of the risks will leave you completely exposed to another. So we tend to compromise or strike a balance between two risks: every individual investor or institutional investor knows what their normal balance between these two risks should be.

Next, investors may consider trying to constantly adjust their balance according to their environment-which is the origin of the title of this memo:

A better environment-the more cautious other investors behave, the better profit prospects, and the lower the price of securities relative to intrinsic value or "fundamentals"-the more likely an investor is to turn to attack.

On the other hand, the more dangerous the environment-the more people embrace risk, the more challenges to profits, the higher valuations-the more likely investors are to choose to emphasize defence.

In recent years, my view is that the world of investment has the following characteristics:

More uncertainty than usual.

Extremely low expected return

Assets are fully or overpriced

Investors take risks in order to strive for higher returns.

All this tells me that there are risks and low returns in the investment world, so Oaktree's rule is "move forward, but act carefully."」

We usually invest all our money, but we are more cautious than we used to be. We decided to emphasize defense, and in some years high risk produced high returns, and we paid the price for caution. We don't know what stimulus will turn risk into loss, and we don't see any obvious possible factors. But we feel that the world is a dangerous place, with the development of negative factors. Now we see the stimulus, and now the risk of the portfolio has caused losses. That's the background.

As mentioned above, I feel uncertain and the low-return environment requires more emphasis on defense than offense. Now, however, it is the opposite of what happened 2, 6, 12 or 24 months ago:

Risks in the environment are identified and most of them can be understood

Expected returns have shifted from negligible to attractive (for example, the average return on high-yield bonds (excluding energy) has risen from 3.5% to nearly 9%)

The price of securities has fallen

Investors have been punished, drying up risk-taking.

Based on these new conditions, I don't think we should put more emphasis on defense.However, the fundamentals have deteriorated and the future may be worse, and the epidemic poses risks (remember, I am the one who favors the pessimistic scenario).But there is a big difference between a market where no one can find any shortcomings and a market where people have given up taking risks. There is a big difference between a market priced according to a perfect scenario and a market that allows bad outcomes to happen.

The prudent allocation of portfolios in recent years has achieved its goal. Investors who choose to defend have lost less this year than offensively, experienced the satisfaction of relatively good performance and can spend more time looking for bargains than dealing with historical problems.Therefore, I think at this time, previously cautious investors can reduce their over-emphasis on defense, start to move to a more neutral position, or even start to attack.It depends on how much they want to seize the early opportunities.

I'm not saying the outlook is optimistic. I mean, conditions have changed so that caution is no longer as crucial as it used to be.

When some of the crisis-related losses have already occurred, I am less worried about losing money and, to some extent, more interested in ensuring that our customers are involved in moneymaking opportunities.My book, Masteringthe Market Cycle, published in 2018, is subtitled to put probability on your side (Gettingthe Odds on Your Side). Similarly, I now feel that probability is better for investors, or at least less disadvantageous to some extent. The portfolio should be adjusted accordingly.

Seek the bottom of the market

Before I finish, let's talk about the bottom of the market. Some of the most interesting issues in investment are particularly suitable for current discussion: "Since you expect more bad news and think the market is likely to fall further, is it too early to do any buying? Shouldn't you wait for the bottom of the market? "

For me, the answer is a clear "no". As mentioned earlier, we never know when we are at the bottom of the market. The bottom is known only in retrospect: the day before the bottom market began to rise.By definition, we don't know if we have reached the bottom today, because the bottom depends on what happens tomorrow. Therefore, the sentence "I will wait for the bottom of the market" is irrational.

If you want, you can choose to say, "I'm going to wait until the bottom ends and the market starts to rise." "this is more reasonable.

But, first of all, you're saying you're willing to miss the bottom. Second, one reason why the market is starting to rise is that sellers' sense of urgency is diminished, and the corresponding selling pressure is reduced. This, on the other hand, means that (a) the supply sold shrinks, and (b) the urgent buying of buyers causes the market to rise because they are now highly motivated. These factors caused the market to rise.

So if investors want to buy, they should buy when it goes down. At this time, the buyer has a sense of urgency, and the buyer's buying behavior will not stop the securities price from falling one after another.

Back in 2008, following Lehman Brothers' bankruptcy filing on Sept. 15, Bruce Karsh and his team embarked on an unprecedented plan to buy the bonds of troubled companies. In the last 15 weeks of the year, they invested an average of about $450 million a week, totaling about $7 billion.

Bond prices collapsed during that time and continued to fall in the first quarter of 2009 (along with the stock market). But because hedge funds facing redemptions have been closed-and because the securitisation instruments of circuit breakers have been liquidated-large-scale sales stopped at the end of the year. In short, if we don't buy in the fourth quarter, we will lose our opportunity.

As the old saying goes, "perfection is the enemy of excellence." "similarly, waiting for the bottom allows investors to miss out on good buying opportunities.The goal of investors should be to make a lot of good purchases, not just a few perfect deals.

Think about your normal behavior. Do you insist that there will never be a lower price for what you want to buy before each purchase? I don't think so. The reason you buy may be because you think you have bought a good thing at an attractive price. Isn't that enough? I believe you sell because you believe the price is right or higher than expected, not because you believe there will never be a higher price.Insist on buying only at the bottom and selling only at the top will make it impossible for you to move.

On the contrary, my memo is titled "Adjustment" because I think portfolio allocation should be based on what happens in the environment and changes over time. When the environment becomes more dangerous (high prices, low risk aversion, no fear), a combination should be more defensive. When the environment becomes better (low prices, high risk aversion, widespread fear), the portfolio should be more aggressive.Obviously, this process is a gradual readjustment process, not a full position or short position decision. Your goal should not be to adjust at the bottom or top.

So it seems to me foolish to wait for the bottom. So what should be the criteria for investors?The answer is simple: when something is cheap-based on the relationship between price and intrinsic value-you should buy it, and if it is cheaper next, you should buy more.

I don't want people to think that it's easy to buy when the price goes down. Not really. In 2008, Bruce and I spent a lot of time encouraging each other, debating whether we bought too fast (or too slowly).

The news is terrible, and for a long time it looks like the vicious circle of financial institutions failing will last forever.Terrible news makes it difficult to buy, so many people say, "I'm not going to try to catch a falling knife." But it is also what drives asset prices to ridiculously low levels.

This is why I like the title of Doug kass I mentioned above so much: "when the time to buy comes, you won't want to buy." "It's not easy to buy when the news is bad, the price collapses, and it's impossible to know where the bottom is. But an investor's greatest ambition should be to be able to do so.

As for the current situation, here are some data, from the April Strategy report of the Gavekal study, to answer whether March was the bottom.

…… After a big fall, the market rarely becomes clear. In only one of the 15 bear markets since 1950, there has been no initial low within three months. In all other bear markets, the bottom appears again or twice. Because the news of the crisis is likely to worsen before it gets better, it seems possible to fall back again.

Here are some data compiled by my son Andrew about the movement of the S & P 500 in the last two major crises. The first and second declines were followed by a sharp rebound. And then give in to an even bigger fall:

9/1/00 - 4/4/01：-27%

4/4/01 – 5/21/01：+19%

5/21/01 – 9/21/01：-26%

9/21/01 – 3/19/02：+22%

3/19/02 – 10/9/02：-33%

10/9/07 – 3/10/08：-18%

3/10/08 – 5/19/08：+12%

5/19/08 – 11/20/08：-47%

11/20/08 – 1/6/09：+25%

1/6/09 – 3/9/09：-27%

Data from Gevekal and Andrew tell us that the market rarely stops falling and rebounds in a straight line. On the contrary, their movement represents an ongoing tug-of-war between bulls and bears, and the result is rarely just in one direction.

After the initial decline and optimistic buyers reacted to the low prices, the pessimists found the new and higher prices unsustainable and joined another round of selling. So this tug-of-war will last for some time.

So, as Oaktree's Wayne Dahl points out, it wasn't until mid-May 2007, or almost seven years, that the stock market returned to its September 2000 high. It was not until mid-March 2013, or five and a half years, that the stock market returned to its October 2007 high.

In short, for me, this statement does not bother me at all:

(a) the market fell significantly lower at some point in the next few months

(B) when we find good value, we will buy it now.

I don't find any contradiction in these expressions.