2021 Q1 Investment Letter (A Pandemic Reflection)

2021 Q1 Investment Letter (A Pandemic Reflection)

The S&P 500 Index returned 6.17% and the S&P Global Broad Market Index returned 5.23% in the quarter ended March 31, 2021.1

As we write this letter, it’s been a little over a year since the COVID-19 pandemic started. So much has changed since then, but hindsight and recency biases have a way of distorting our memories and softening the contrast between then and now. They also make it seem like the events of the intervening months were more predictable than they actually were. As a result, we think it’s worth taking a stroll through the headlines of a year ago. In this way, we can get a much better sense of both what actually happened in the past as well as what most commentators and investors were thinking at the time. So, without further ado . . .

What did the economic news and commentary look like at the time?

How Bad Might It Get? Think the Great Depression: The coronavirus collapse has the ingredients to surpass the disaster of the 1930s. (Bloomberg – April 22, 2020)2

Who Will Thrive in the Coming Deflation? (Treasury and Risk – April 28, 2020)3

Terminal Deflation is Coming (Foreign Policy – April 29, 2020)4

Great Depression 2020? The unofficial U.S. jobless rate is at least 20%–or worse (Marketwatch – May 11, 2020)5

Will a Global Depression Trigger Another World War? (Foreign Policy – May 13, 2020)6

Second-quarter GDP plunged by worst-ever 32.9% amid virus-induced shutdown (CNBC – July 30, 2020)7

Let’s call it what it is. We’re in a Pandemic Depression. (Washington Post – August 9, 2020)8

How did financial markets respond and what were commentators writing about them?

Over $26 billion wiped off cryptocurrency market in 24 hours after massive oil price plunge (CNBC – March 8, 2020)9

A Hellish Week for Markets Isn’t Over Yet: History suggests there’s worse to come before stocks recover. (Bloomberg – March 12, 2020)10

Credit Markets signal the US risks heading towards a financial crisis (CNBC – March 17, 2020)11

This was the fastest 30% sell-off ever, exceeding the pace of declines during the Great Depression (CNBC – March 23, 2020)12

Data Reveals the Stock Market Crash Is Far From Over (Traders Magazine – April 2, 2020)13

Fed Is Seizing Control of the Entire U.S. Bond Market (Bloomberg – April 9, 2020)14

Free-Falling: Oil Prices Keep Diving As Demand Disappears (NPR – April 20, 2020)15

‘Unreal’: Oil prices go negative for the first time in history (Fortune – April 20, 2020)16


What were experts saying about the prospects for a vaccine?

What happens if a coronavirus vaccine is never developed? It has happened before (CNN – May 4, 2020)17

Why we might not get a coronavirus vaccine: Politicians have become more cautious about immunisation prospects. They are right to be (The Guardian – May 22, 2020)18

There may never be a ‘silver bullet’ for COVID-19, WHO warns (NBC News – August 3, 2020)19


Given this backdrop, what were some of the smartest and most successful investors of our generation saying at the time?

Ray Dalio predicts a coronavirus depression: ‘This is bigger than what happened in 2008’ (CNBC – April 9, 2020)20

Buffett on why he hasn’t made any big investments: ‘We don’t see anything that attractive’ (CNBC – May 2, 2020)21

David Tepper says this is the second-most overvalued stock market he’s ever seen, behind only ’99 (CNBC – May 13, 2020)22

Druckenmiller Says Risk-Reward in Stocks Is Worst He’s Seen (Bloomberg – May 13, 2020)23


Okay, let’s fast forward. What does economic news and commentary look like today?

Inflation is Coming. That Might Even Be a Problem. (Bloomberg – January 13, 2021)24

Forecast predicts another Roaring ’20s (University of Miami News – January 22, 2021)25

Inflation Is Coming For Your Wealth. Here’s What Investors Can Do About It (Forbes – February 26, 2021)26

10% GDP growth? The U.S. economy is on fire, and is about to get stoked even more (CNBC – March 2, 2021)27

Unemployment falls to 6.2%, US adds 379,000 jobs and economic optimism grows (Chicago Tribune – March 5, 2021)28

Goldman Sachs forecasts a jobs boom, says unemployment rate could fall to 4.1% by the end of 2021 (CNBC – March 8, 2021)29


How are the financial markets doing, and what are commentators saying?

Pandemic-induced options trading craze shows no signs of slowing down (CNBC – December 4, 2020)30

Goldman says the SPAC boom will continue and found a way to spot ones that may outperform (CNBC – December 14, 2020)31

Larry Berman: Speculation in call volume hits all-time extremes (BNN Bloomberg – January 11, 2021)32

Commodity prices are surging: Is a new supercycle beginning? (The Economist – January 12, 2021)33

The SPAC Boom Rolls on Into 2021: In January, an average of 5 new SPACs has been launched every business day (Morning Brew – January 24, 2021)34

Russell 2000 Hits New Record as Small Cap Leadership Continues (StockCharts – February 5, 2021)35

Junk Bonds With Low Yields? Here’s Why They’re Hot (Bloomberg – February 24, 2021)36

Oil is up nearly 70% since the election, a record in the modern era (CNN – February 26, 2021)37

Investors are taking on record amounts of debt to buy stocks, and it’s a bullish sign for the market, BofA says (Business Insider – March 2, 2021)38

Dow Hits Record High on Swashbuckling Stimulus-Led Rally in Cyclicals (Yahoo Finance – March 8, 2021)39

Inflation fears pump bitcoin prices above $56,000 (CNBC – March 11, 2021)40

The Booming IPO Market Shows No Signs of Slowing (Barron’s – March 12, 2021)41

Many Americans using their stimulus checks to dabble in the stock market: ‘Whatever. I’ll give it a shot’ (Baltimore Sun – March 21, 2021)42

A Return to Wall Street’s Low Rent District: Penny Stocks are Back. Critics are Worried. (New York Times – March 22, 2021)43

Stock Market Today: Dow, S&P 500 Surge Late, Set New Highs (Kiplinger – March 26, 2021)44


And it’s not just the financial markets. Let’s look at what’s going on in housing.

Toll Brothers Says the Housing Market Is the Hottest in 30 Years (Barron’s – December 8, 2020)45

It has been the frothiest market I’ve ever seen: Redfin CEO on housing market (CNBC – January 26, 2021)46

‘It’s crazy. There is no inventory.’ Housing industry veteran marvels at real estate boom (CNN – March 26, 2021)47


Even the collectibles market is experiencing surging prices, as the headlines below demonstrate.

9 collectibles soaring in value during the pandemic (WCPO Cincinnati – February 18, 2021)48

NBA fans are spending thousands on the latest digital collectible craze (NewsNation – February 25, 2021)49

How NFTs are fueling a digital art boom (CNN – March 10, 2021)50

JPG File Sells for $69 Million, as ‘NFT Mania’ Gathers Pace (New York Times – March 11, 2021)51

Increasing Interest In High-End Collectibles Causes Auction Prices To Skyrocket (WBUR – March 18, 2021)52

Okay, now that we’ve shown you the headlines, are there any lessons we can take away from them? We certainly think so.

First, what an unbelievable contrast! We don’t ever remember a time when the narrative changed so much so fast.

Second, what short memories investors have! Just one year ago, many of us, including many of the most successful investors and economists of our generation, were very worried about a Great Depression. Now, many investors are bingeing on the riskiest financial products, most of which trade at very high valuations relative to history, and using a bunch of leverage to do it! If this doesn’t validate our claims about hindsight and recency bias and their distorting effects on our emotional and intellectual memories, we don’t know what will!

Third, we think this exercise in headline-reading should put to rest the idea that the future is predictable. Importantly, this isn’t to say that the investors we quoted were wrong to be cautious a year ago. Perhaps the stock market was a bad risk-reward bet at the time, especially given the uncertainty around the timing and efficacy of a vaccine. Perhaps it’s a good risk-reward today, even at these much higher prices. We don’t know what will happen, especially over the short- to medium- term. As we hope this juxtaposition shows, no one else does either.

Fourth, if the future is unpredictable and things can change so fast and unexpectedly, both positively and negatively, then one needs a robust and methodical plan of action to deal with this unpredictability. In designing this plan, we think it’s important to recognize that inflation has massively eroded the value of cash in almost every society for a simple reason that we believe is unlikely to change in the future: devaluing money is the most politically expedient way to pay for government spending. Therefore, though cash is the safest asset for short-term spending needs, we believe the risk of inflation makes it a suboptimal solution for long-term spending needs. In our view, productive assets that have the potential to maintain or grow your purchasing power are much better than cash for long-term spending needs. Furthermore, for reasons we’ve detailed in the past, including the astounding fact that 1 dollar invested in the stock market in 1900 grew to 69,754 dollars by the end of 2020,53 our favorite productive assets are publicly-traded equity ownership stakes in businesses (stocks).

However, psychologists have shown that people, on average, experience about two times as much pain for every dollar of loss as they do pleasure for every dollar of gain,54 and, unfortunately, stock markets occasionally lose 50% or more of their value and many individual stocks experience permanent losses of this magnitude. Given the psychological pain of loss, we do our best to construct portfolios that can avoid scenarios of catastrophic permanent decline, which can occur if 1) a large percentage of our equity ownership stakes experience severe and permanent economically- or competitively-driven impairment or 2) we or our clients panic-sell out of a substantial portion of our stock portfolio in response to declines that later prove to be temporary. In our view, the best way to reduce the likelihood of these types of permanent impairment is to invest in a diverse collection of global champions with enduring pricing power and long-term volume growth opportunities run by ownership-minded management teams who run their businesses with conservative capital structures (so conservative, in fact, that they will get criticized in good times for this conservatism).

Furthermore, because of the psychological reality of loss aversion and that fact that either severe economic distress or disruptive change could occur, completely unpredictably (see COVID-19 pandemic above), at any moment, we would manage the portfolio this way even if it meant somewhat below-average gains. However, academic research suggests that, historically, because people have a desire to “get rich quick” and are overconfident in their abilities to do so, owning the largest, highest-quality, most conservatively-financed businesses in industries retaining or growing their global relevancy has resulted in better-than-average returns55–and, because we believe these businesses are less risky, much-better-than-average risk-adjusted returns. Whether this effect will continue into the future is anyone’s guess, but we will continue to give preference to safety even if this historical return premium disappears.

Additionally, we will continue to rebalance into these great businesses (if it makes sense from a tax perspective) when they experience macroeconomic or operational worries or setbacks, as we believe investors tend to overly penalize stock prices in these cases. As we think back, almost all of today’s best businesses have experienced crises of confidence that led to big stock price declines and cheap valuation multiples: Mastercard and Visa with the Durbin Amendment which capped debit card interchange fees; Moody’s and S&P Global with their role in the 2008 financial crisis; Apple with fears related to the company’s reliance of mobile phone sales; PayPal with fears of new payments competitors; MSCI with their large customer Vanguard leaving; Schwab and the banks with interest rate fears; Nike with the rejuvenation of Adidas; Adobe, Microsoft, and Intuit with worries about their decreased relevancy in a mobile phone world as well as worries surrounding their software-as-a-service business model transformations; luxury stocks with fears of a corruption crackdown in China; CBRE with fears of a pandemic-driven commercial real estate collapse; Verisk with overpayment and competitive fears surrounding their Wood Mackenzie acquisition; Copart and Progressive with fears of driverless cars, and Estee Lauder with fears of department store collapse. We could go on and on, but this long list gives a flavor for the almost inevitable nature of these crises of confidence. Unfortunately, because of the unpredictability of the future, we can’t know which business is next up on the list and which threats will turn out to be truly injurious to the businesses. However, we feel confident that these crises of confidence are, on average, great buying opportunities, and we’ll likely rebalance into these situations when they occur in the future, though we will limit the maximum amount we’re willing to risk, especially for levered and/or mostly domestic businesses which have fewer degrees of freedom to solve their problems than global, diversified businesses with large cash balances and low or no debt.

Lastly, we’ll pay attention to the investment environment more generally. In today’s environment, with buoyant stock markets (especially in so-called “cyclical recovery plays” and small- to mid-capitalization “disruptors/innovators”), surging IPO and SPAC listings, record stock market leverage in the form of margin debt and call-buying, and numerous collectibles crazes, we think it’s even more important to preference large, dominant global champions with pricing power, net cash, and lower-than-average cyclicality.


Because of hindsight and recency bias, many people believe the future is predictable. It is not, and the events over the last year, when viewed through the lens of the headlines then and now, should thoroughly disabuse us of this notion. However, even though the future is unpredictable, we’re not helpless. We can devise and methodically execute a plan that increases the number of potential futures in which we can survive and thrive. In our view, the plan that makes the most sense, both empirically and psychologically, is to own a diverse group of global champions with enduring pricing power and conservative capital structures and to rebalance among these businesses when investors become too focused on short-term business drivers.

As always, should you have any questions or need assistance, please do not hesitate to call or email us. Thank you for your continued trust and confidence in YCG, know we are invested right alongside you, and we hope you have a wonderful start to the new year!


The YCG Team

Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security nor were they selected based on profitability. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not necessarily reflect current recommendations nor do they represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. A complete list of all securities recommended for the immediately preceding year is available upon request. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. S&P stands for Standard & Poor’s. All S&P data is provided “as is.” In no event, shall S&P, its affiliates or any S&P data provider have any liability of any kind in connection with the S&P data. MSCI stands for Morgan Stanley Capital International. All MSCI data is provided “as is.” In no event, shall MSCI, its affiliates or any MSCI data provider have any liability of any kind in connection with the MSCI data. Past performance is no guarantee of future results.


1 For information on the performance of our separate account composite strategies, please visit www.ycginvestments.com/performance. For information about your specific account performance, please contact us at (512) 505-2347 or email [email protected].  All returns are in USD unless otherwise stated.

2 See https://www.bloomberg.com/opinion/articles/2020-04-22/the-coronavirus-recession-will-rival-the-great-depression.

3 See https://www.treasuryandrisk.com/2020/04/28/who-will-thrive-in-the-coming-deflation/?slreturn=20210224172143.

4 See https://foreignpolicy.com/2020/04/29/federal-reserve-global-economy-coronavirus-pandemic-inflation-terminal-deflation-is-coming/.

5 See https://www.marketwatch.com/story/great-depression-2020-the-unofficial-us-jobless-rate-is-at-least-20or-worse-2020-05-08#:~:text=%E2%80%9CThe%20unemployment%20rate%20’only’,economics%20at%20Macro%20Renaissance%20Research.&text=The%20rate%20of%20joblessness%20is,of%20the%20decadelong%20Great%20Depression.

6 See https://foreignpolicy.com/2020/05/13/coronavirus-pandemic-depression-economy-world-war/.

7 See https://www.cnbc.com/2020/07/30/us-gdp-q2-2020-first-reading.html.

8 See https://www.washingtonpost.com/opinions/lets-call-it-what-it-is-were-in-a-pandemic-depression/2020/08/09/3904faf4-d8e5-11ea-aff6-220dd3a14741_story.html.

9 See https://www.cnbc.com/2020/03/09/bitcoin-btc-and-other-cryptocurrency-prices-plunge-after-oil-drop.html.

10 See https://www.bloomberg.com/opinion/articles/2020-03-13/history-suggests-stock-market-crash-has-further-to-run.

11 See https://www.cnbc.com/2020/03/17/credit-markets-signal-the-us-could-be-heading-towards-financial-crisis.html.

12 See https://www.cnbc.com/2020/03/23/this-was-the-fastest-30percent-stock-market-decline-ever.html.

13 See https://www.tradersmagazine.com/departments/equities/data-reveals-the-stock-market-crash-is-far-from-over/.

14 See https://www.bloomberg.com/opinion/articles/2020-04-09/coronavirus-fed-is-seizing-control-of-entire-u-s-bond-market.

15 See https://www.kuow.org/stories/free-falling-oil-prices-keep-diving-as-demand-disappears.

16 See https://fortune.com/2020/04/20/oil-prices-negative-crash-price-crude-market/.

17 See https://www.cnn.com/2020/05/03/health/coronavirus-vaccine-never-developed-intl/index.html.

18 See https://www.theguardian.com/world/2020/may/22/why-we-might-not-get-a-coronavirus-vaccine.

19 See https://www.nbcnews.com/health/health-news/there-may-never-be-silver-bullet-covid-19-who-warns-n1235618.

20 See https://www.cnbc.com/2020/04/09/ray-dalio-predicts-coronavirus-depression-this-is-bigger-than-2008.html.

21 See https://www.cnbc.com/2020/05/02/buffett-on-why-he-hasnt-made-any-big-investments-we-dont-see-anything-that-attractive.html.

22 See https://www.cnbc.com/2020/05/13/david-tepper-says-this-is-the-second-most-overvalued-stock-market-hes-ever-seen-behind-only-99.html.

23 See https://www.bloomberg.com/news/articles/2020-05-12/druckenmiller-says-v-shaped-recovery-for-u-s-is-a-fantasy#:~:text=Stan%20Druckenmiller%20said%20the%20risk,overcome%20real%20world%20economic%20problems.&text=But%20those%20programs%20aren’t,future%20economic%20growth%2C%20Druckenmiller%20said.

24 See https://www.bloomberg.com/opinion/articles/2021-01-13/inflation-is-coming-to-the-u-s-and-the-fed-could-be-in-a-bind.

25 See https://news.miami.edu/stories/2021/01/forecast-predicts-another-roaring-20s.html.

26 See https://www.forbes.com/sites/greatspeculations/2021/02/26/inflation-is-coming-for-your-wealth-heres-what-investors-can-do-about-it/?sh=6b072bb4b145.

27 See https://www.cnbc.com/2021/03/02/10percent-gdp-growth-the-us-economy-is-on-fire-and-is-about-to-get-stoked-even-more.html.

28 See https://www.chicagotribune.com/business/ct-biz-february-unemployment-rate-20210305-v4ettj77ozerxdontyp4ma55va-story.html.

29 See https://www.cnbc.com/2021/03/08/goldman-sachs-forecasts-a-jobs-boom-says-unemployment-rate-could-fall-to-4point1percent-by-the-end-of-2021.html.

30 See https://www.cnbc.com/2020/12/04/pandemic-induced-options-trading-craze-shows-no-signs-of-slowing-down.html.

31 See https://www.cnbc.com/2020/12/14/goldman-says-the-spac-boom-will-continue-and-found-a-way-to-spot-ones-that-may-outperform.html.

32 See https://www.bnnbloomberg.ca/larry-berman-speculation-in-call-volume-hits-all-time-extremes-1.1546842.

33 See https://www.economist.com/finance-and-economics/2021/01/12/commodity-prices-are-surging.

34 See https://www.morningbrew.com/daily/stories/2021/01/25/spac-boom-rolls-2021.

35 See https://stockcharts.com/articles/chartwatchers/2021/02/russell-2000-hits-new-record-a-541.html.

36 See https://www.bloomberg.com/news/articles/2021-02-25/junk-bonds-with-low-yields-here-s-why-they-re-hot-quicktake.

37 See https://www.cnn.com/2021/02/26/investing/oil-prices-gas-biden-election/index.html.

38 See https://markets.businessinsider.com/news/stocks/stock-market-outlook-record-margin-debt-bullish-sign-bofa-2021-3-1030141618.

39 See https://in.news.yahoo.com/dow-hits-record-high-swashbuckling-132824335.html.

40 See https://www.cnbc.com/video/2021/03/11/inflation-fears-pump-bitcoin-prices-above-56000.html.

41 See https://www.barrons.com/articles/the-booming-ipo-market-shows-no-signs-of-slowing-what-investors-need-to-know-51615546800.

42 See https://www.baltimoresun.com/coronavirus/ct-aud-nw-nyt-stimulus-checks-stock-market-20210321-r5jhwdreivehbazsd4j4sfansi-story.html.

43 See https://www.nytimes.com/2021/03/18/business/dealbook/penny-stocks-mania.html.

44 See https://www.kiplinger.com/investing/stocks/602510/stock-market-today-032621-dow-sp-500-surge-late-new-highs.

45 See https://www.barrons.com/articles/toll-brothers-says-the-housing-market-is-the-hottest-in-30-years-51607449669.

46 See https://www.msn.com/en-us/money/smallbusiness/it-has-been-the-frothiest-market-ive-ever-seen-redfin-ceo-on-housing-market/vi-BB1d7gMQ.

47 See https://www.cnn.com/2021/03/26/business/housing-market-shortage/index.html.

48 See https://www.wcpo.com/money/consumer/dont-waste-your-money/9-collectibles-soaring-in-value-during-the-pandemic.

49 See https://www.newsnationnow.com/sports/nba-fans-are-spending-thousands-on-the-latest-digital-collectible-craze/.

50 See https://www.cnn.com/style/article/nft-digital-art-boom/index.html.

51 See https://www.nytimes.com/2021/03/11/arts/design/nft-auction-christies-beeple.html.

52 See https://www.wbur.org/hereandnow/2021/03/18/auction-prices-soar.

53 In nominal terms. In real terms, 1 dollar grew to 2,291 dollars, meaning an investor had, almost inconceivably, multiplied their purchasing power by 2,291 times over this 120-year period despite numerous world wars, depressions, and pandemics! See page 14 of the Credit Suisse Global Investment Returns Yearbook 2021, which can be found here: https://www.credit-suisse.com/about-us-news/en/articles/media-releases/credit-suisse-global-investment-returns-yearbook-2021-202103.html.

54 See https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/loss-aversion/.

55 See http://rnm.simon.rochester.edu/research/QDoVI.pdf.