by Jun 6, 2020Memos0 comments

Tough Times Will Continue

In this new world of COVID-19 there has been multiple stages of investors realization that this is not going to be an event where we see a quick rebound (Even though lately the S&P has indicated otherwise).  Many investors did not take COVID-19 news seriously until the full shutdown was implemented and even then, the full impacts are gradually being understood.  Right now, many investors have still yet to realize the damage that has been caused as we see the S&P 500 having recovered ever closer to its pre COVID-19 levels.  There seems to be a great disconnect between some stocks and how the economy is likely to perform over the next few years.

In Canada the federal government will now be running a deficit of close to 90% of their 2018 revenues.  This is after rolling out aid packages that will only account for a short amount of time relative to how long we anticipate this virus will impact our economy.  It is unreasonable to believe that this level of support for the economy can be sustained for the long term if government revenues do not recover quickly.

If you have a certain standard of living that is based upon a certain level of expected income and then all of a sudden you stop working for 2-3 months then you either reduce your expenditures or take on debt to settle the difference. For example, Airlines are not “working” and they still have a lot of legacy fixed costs that they can not eliminate.  This has resulted in them taking one on debt to fill the gap. 

High capital cost industries such as airlines, cruise lines and hotels have suffered and will continue to suffer in this environment as travel restrictions continue to limit their revenue generation abilities while still having to carry significant fixed costs.  The longer restrictions are put in place there is an increasingly likelihood that many of these operators will file for bankruptcy protection.

Cruise traffic has been banned in Canada until October which, by then it will already be the end of the cruise season.  All those local businesses that benefit downstream from cruise ships will have to wait another 6-7 months for what they hope will be a resurrection of their industry, if they can survive that long. 

Even governments have limited borrowing capacity at some point and will not be able to save every failing industry.

When considering buying into the most hard-hit companies during this pandemic you have to consider the dilution of their shareholder base and their future debt obligations that will impact their earnings generation ability going forward.  If you had evaluated a stock before the pandemic and it is now trading well below what you originally thought the intrinsic value was, then it is important to dive back in and see what has changed to their capital structure before in investing. 

Unpaid Liabilities & Debt Do Not Just Disappear

There is an old Seinfield episode that was aired back in the 90’s where Kramer convinces Jerry to say his stereo was broken during shipment so that he gets an insurance payout for the item. There is a conversation that ensues about write-offs which reminds me of what many people think that a write-off is of no real expense to the company supplying the insurance/stereo:

Kramer:   “It’s just a write-off for them.

Jerry:       “How is it a write-off?”

Kramer:   “They just write it off.”

Jerry:       “Write it off what?”

Kramer:   “Jerry, all these big companies, they write-off everything.”

Jerry:       “You don’t even know what a write-off is.”

Kramer:   “Do you?”

Jerry:       “No. I don’t.”

Kramer:   “But they do, and they are the ones writing it off.

Investors are underestimating the potential impacts that COVID-19 is having on the balance sheets of their current or potential investments.  Debt does not randomly disappear.  If a renter decides to not pay one month of rent, then either the liability is carried over to the next month and stays with the renter or the landlord decides to absorb the liability themselves. However, if there is a chain of events where the landlord can not pay his mortgage on the property due to absorbing that renter’s liability, then the debt will pass to his/her bank or other mortgage provider.  The liability or “write-off” does not ultimately disappear, it just transfers hands with someone or some entity left holding it somewhere down the line. 

If this environment continues where debt continues to pile up, the liability will increasingly be passed up the chain to a higher level of organization who is in the better position to absorb the liability.  This is appropriate in a pandemic situation however as mentioned previously even the government has limited borrowing capacity as we can see with numerous cities and provinces who have become concerned with their ability to fund their budgetary commitments. 

Be Careful How You Bet

There is a light at the end of this COVID tunnel and these markets are presenting an opportunity of a lifetime for some stocks, but an investor has to be careful as to which ones they select.

In this years Berkshire Hathaway AGM, Warren Buffett starts off the meeting going over the history of America and its resiliency since its inception.  He translates this history into a business case that continuing to invest in America, over the long run, will payoff despite the current struggles with the COVID-19 pandemic.  He however qualifies this statement that even though he strongly believes in the future of America, he warns investors that they still have to be careful how, where and what entities they decide to invest in.

Over the course of history there have been plenty of businesses who have failed even though America (overall) continues to innovate, grow and increase its wealth over time.  Think back to all the industries and companies that have been disrupted due to various things such as technological change, too much debt and better competition. 

Some companies today who seemed just to be down on their luck and who have been around for a very long time may seem like a sure bet for multi beggar returns.  That however may not be the case as we have seen with recent bankruptcy filings like Hertz, JC Penny and J.Crew.  These companies once dominated their industries but now are slowly spiraling to their death.

A falling stock price is not a reason in itself to invest in a company.  It is making the estimation of future cashflows (owners’ earnings) that the business will produce in a given time period and paying a reasonable price for those earnings.  Companies are throwing away their recent 5-year forecasts due to COVID-19 because the next 5 years looks a lot more difficult than it did 1 year ago.

Value Investing and Its Nay Sayers

There has been some discussion in the investing community that value investing is no longer relevant in today’s markets.  Let’s just clear things up for anyone who might be confused with these types of headlines.   There is only one type of investing and that is value investing.  What is normally meant by investors who state that value investing is “dead” is the traditional Ben Graham way of identifying investments through price to book. This however is only one of the many ways value can be uncovered in an organization. 

Value investing is very simple.  It is the idea of buying something for less than its intrinsically worth based on the discounted cash flows that can be generated by the business over a certain period of time. 

Value investing can apply to money losing companies with highly undervalued assets that can be sold to competitors or it can apply to high growth tech companies that are growing revenues 20% per year.   To be a value investor your mind must be flexible, continually thinking of various different businesses and how you as an investor should define its value. 

Value investors don’t need to fit into a stereotypical box of looking for stocks which are trading less than net working capital.  The goal of investing is to expend money with the expectation of generating more money than you have today through the application of deep thought and rational.

If you have any suggestions, comments or feedback that you would like to share feel free to email me at

Enjoy the Journey,

Alex Middleton


Welcome to!

My name is Alex Middleton and I am from Calgary, Alberta.  I believe investing requires one to carefully study publicly available information in an attempt to develop a thesis based on reason and logic.  It also requires one to properly account for the unknown by applying probabilities and margin of safety to their thesis.  I hope you enjoy the content!