By: Philip MacKellar

Published: April 11, 2025

Markets are in crisis, and for good reason.

Tariffs are scary. Historically, they have had devastating impacts on economies, especially if they are large, sudden and far-reaching – and in the case of U.S. President Donald Trump’s approach, they are all three. Levies on imports can set off a vicious supply shock cycle. Prices rapidly climb. Consumers reduce spending. Companies lay off staff and curtail investments in new equipment or facilities. New business formation declines. Corporate profits sink. Investment dries up. Trading partners retaliate. And the cycle continues.

Not only do tariffs set off a vicious cycle, but they increase the risk of conflict between nations. Trade builds trust, interdependence and goodwill. Tariffs do the opposite.

Mr. Trump’s tariffs represent an unforced policy error of epic proportions. Trade wars are easy to start but are hard to stop. Hopefully, the market’s reaction, domestic pressure and global indignation will convince the Trump administration to reverse course or cut face-saving deals. Some have suggested this is the Trump administration’s way of forcing countries to open their economies. While that may be the case, it is a risky way to go about it.

Regardless of Mr. Trump’s goals, it is important to remember that the bad is rarely as bad as you think, and the good is rarely as good as you hope. Nearly every economic crisis seems insurmountable when it emerges, but few actually are. The trick is learning how to manage a portfolio through a crisis, because if you invest long enough, they will inevitably occur.

Here at Contra the Heard Investment Newsletter, we have a playbook for such situations.

First, we regularly extol the value of holding cash. The market selloff, especially since April 3, exemplifies this point. The Contra Portfolio has taken a hit, but the scale of the damage has been less than the benchmark or index-tracking ETFs. Moreover, unlike those who are 100 per cent invested, our portfolio has the means to take advantage of the situation. Being in a position to deploy cash is much more comfortable than being all in and just enduring the pain or horse-trading between losing positions.

Some will argue investors should always be fully invested because markets cannot be timed. My response would be: Okay, but can markets or stocks be valued? The answer is yes, they can, which in turn signals when investors should be net buyers or net sellers.

Our second selloff strategy involves how to deploy cash once a market rout starts. Downturns are good for investors, as they generate opportunities to pick up assets at depressed levels. This said, it is important not to throw all the cash into stocks quickly, especially before governments and or central banks step in with stimulus or counteracting measures.

In previous downturns, especially sharp or deep ones, my strategy has been to chip away at new and existing positions. In late 2008 and early 2020, for example, markets were in free fall, and each week I tried to make at least one trade. Nothing big or flashy, just small- or medium-sized purchases. I had no idea where the bottom was, but it was a great time to invest because valuations were low, investor fear was through the roof and few others were buying – excluding insiders.

At the start of April, I dusted off this playbook and have made three purchases for the Contra Portfolio so far this month. The first was a small-cap overseas technology company that does significant work in India, Asia-Pacific, and Europe. The second was a mid-sized corporation doing business around the globe. Unlike most multinationals, however, this organization has manufacturing facilities in the countries where it operates. This means – roughly speaking – what they make in one country stays there. Third, I bought a New Zealand-based firm, which has shares listed in the United States.

All three corporations will be somewhat insulated from the direct impacts of tariffs, and we think they have the financial strength to endure the current environment and excel over time. If this downdraft continues or intensifies, these acquisitions will likely be followed by more.

It is possible we execute large trades, too. But before that happens, a trade war truce or reversal would be preferable, as would announcements about stimulating the economy from central bankers or governments. However, despite Trump’s 90-day pause on some countries, a permanent truce or reversal does not look likely at the moment. Nations are striking back against the U.S., China in particular, and central bankers may be on hold, as they are in a tough position and are contending with the possibility of stagflation.

Our final strategy is avoiding being a forced seller. Unless an organization is facing a liquidity risk, it is often best to sit back and avoid pressing the big, red, panic (sell) button. To figure out if companies you own are in trouble, read through the financials, look for going concern warnings, and heed sharp analyst or credit rating downgrades. Once you have dealt with positions facing liquidation risk, do yourself a favour: Take a deep breath, turn off the screen and go for a walk.

By holding cash, deploying it steadily into new and existing positions, and avoiding panic selling, investors should be able to weather most downturns. The strategy is imperfect, but it enables us to pick up shares on the cheap and take advantage of falling valuations without accurately calling the bottom. It has also prevented us from freezing up or forgetting the market is cyclical.

Ultimately, bull markets and bear markets are a fact of life. You need to navigate both.

Philip MacKellar is the general manager at Contra the Heard Investment Newsletter.