In our last letter, we explained why we think the pandemic seems unlikely to significantly alter the stock market’s fair value.
Now, let’s talk about price.
In crisis periods, stock prices can fall a lot, even if their underlying fair value hasn’t changed all that much. These steep declines are typically the result of decreased liquidity (everyone needing their money back at the same time) and investor fear, both of which tend to reinforce themselves and each other.
But to the extent that these crashes result in prices falling below fair value, prices are likely to recover once the crisis has passed. At least this is how it’s always happened in the past, and we can find no reason to believe it has changed.
We don’t think anyone can reliably know what the mood swings and liquidity cycles of the market will do to prices in the short term. (And we think trying to time getting in and out of the market is more likely to hurt than help, a topic we’ll cover more in our next letter).
But we can feel fairly confident in two things: the value of what we own, and the likelihood that prices will eventually make their way towards that value.