This is the first issue we’ve completely put together while being under shelter-in-place orders. Working remotely has taken a bit of an adjustment on our end, but we’re getting more efficient and my fellow AAII staffers deserve credit for the hard work they have put in.

Whenever there are events beyond my control, I find it helpful to focus on what I can control. One thing I’ve done every morning during this pandemic is go for an early morning walk or run. On weekdays, this includes listening to podcasts of American Public Media’s Marketplace evening show. It’s a show I was routinely listening to while walking back and forth to the train before sheltering in place (and for many years prior to joining AAII). Doing so helps me maintain a sense of normalcy.

In terms of investing, a sense of normalcy amid the extraordinarily high level of volatility we incurred can be found by simply sticking to your rules. You can’t control what Mr. Market is doing—especially when he is in a high-speed elevator with the lights blacked out—but you can control how you invest and the decisions you make.

Some AAII members have responded to coronavirus-related volatility in the financial markets by buying. How do we know this? We asked. Our latest Big Question survey focused on the market’s volatility and how individual investors have responded. You can see the responses here.

Value-based and contrarian investing are underlying themes in many of the articles appearing in this month’s issue. A chart in our latest Model Shadow Stock Portfolio update is part of this narrative. AAII president John Bajkowski plotted the median price-to-book ratios of S&P 500 companies against the median price-to-book ratios for S&P SmallCap 600 companies. Large-cap stocks have historically commanded higher price-to-book ratios, an average of 2.81 versus 1.91 for small-cap stocks, over the last 22 years. This differential is not surprising given the lower risk of large-cap companies and the greater amount of attention they receive.

The difference equates to a ratio of 1.47 (2.81 ÷ 1.91). Such ratios are helpful because they make it easy to determine if the valuation spread is large or small. The bigger the ratio, the bigger spread and the cheaper small-cap stocks are relative to large-cap stocks. The ratio stood at 2.12 on April 17, 2020—40% larger than average. Small-cap stocks are the cheapest they’ve been relative to large-cap stocks in more than two decades.

An oft-used investing phrase applies here: reversion to the mean is a pain. If you assume the 22-year average is representative of the valuation small-cap stocks should trade at relative to large-cap stocks, then an argument can be made for small-cap stocks to outperform large-cap stocks in the future.

The challenge with reversion to the mean is waiting for it to happen. The market can stay irrational long enough to cause many to abandon their strategies. The advantage of being an individual investor is having the patience to stick with strategies that have worked over the long term. The long-term data shows a big advantage to small-cap value strategies. While such stocks have underperformed over the past several years, at some point the pendulum will swing back. We can’t predict when. What we can tell you is that the rubber band representing the differences in relative valuations has become very stretched.

If you want more investing ideas, check out our webinars. We’ve started holding live digital events discussing the market environment, investment strategies and other matters important to individual investors. You can register for upcoming webinars and watch previous ones in the new Community section of AAII.com. While you’re there, be sure to check out our Local Chapters. Many of them have pivoted to webinars to avoid hosting large in-person gatherings during the pandemic.

Finally, many AAII members have been asking me about all the changes to the tax law and regulations. If you feel like you haven’t been able to keep up with them, don’t feel bad, there are a lot of moving parts. To help you make sense of them, I put together a midyear update to our tax guide. 

Wishing you prosperity and good health,