How To Think About Investing During Coronavirus.
…not as surprising as you’d like to think.
It is fun observing America from afar. I live in Europe, but I have all my wealth in U.S. stocks, and so everyday I am glued to cnbc’s and bloomberg’s market reporting — the showbiz of overhyped ups-and-downs. It feels like watching earth from future. Europe is much calmer, laid back, as if the virus passed already.
I also cannot help but think that America is embarrassed by the coronavirus. Much like after the 2008 meltdown, there is this hurting realization of American system failing that echoes throughout the whole society, and far beyond thanks to the media muscle of the American showmen.
It doesn’t make sense. The very essence of any crisis is that it shoots down the system. Indulging in circular discussions about America’s unpreparedness for the pandemic, or why the buyback CEOs shouldn’t be bailed out is besides the point. America’s strength is not in having a patent for some fail-proof system, but rather in being constantly able to reinvent itself.
Still, I am not arguing that the corona crash is not deep, and yes, the market showmen weren’t exaggerating when market dipped 30% in March. When things break down so much, some people will emerge winners and others will fail. The question is vital to us investors, too: who are the winners post-corona? Amazon .. sure, and then who else?
Boston Consulting Group identified companies which emerged stronger from the last major crash — the 2008 meltdown — and analyzed what they’ve done right. Don’t expect any surprises; their conclusions were quite predictable and, well, underwhelming.
The winners didn’t win because they pivoted with brilliance, or because they invented some revolutionary technology, or some other epiphanic moment. Instead, they were companies that 1. entered the crisis with enough cash to survive (and invest) when others suffered, and 2. had a product or technology already established in the market.
Companies like Abiomed, Booking Holdings and ASML Holding — which BCG analyzed in depth — didn’t do anything outside of the ordinary. They sticked to their themes (ASML decided to grow further into a segment that was in a recession at the time) and invested to improve their product (Abiomed completed an acquisition despite the uncertainty from the crisis).
Don’t overthink it. We are looking in the broken glass of the corona crisis, trying to predict some out-of-the-ordinary future developments, when the reality is far more boring.
What it all comes down to, is that successful companies have something people want. Apple has luxury electronics done best, Facebook sells vanity and Google has information, always the one you need. They are like McDonald’s, which managed to stay on top since 1960s because its food is irresistible (and other things).
Over time, these companies have managed to build moat because they focused on that something people want, while avoiding making mistakes. McDonald’s would at best do some cosmetic improvements like electronic ordering, but it stays always firmly loyal to its sandwiches. Apple is not rushing to put 5G in its devices because it is far more important that it can make them best. Everyone expected Facebook to fail with the rise of smartphones in the late 2010s (smaller screens, less ad space..?), but they’ve proven everyone wrong — people still want to see what their neighbors are posting, only better if they can do it every hour on a smaller screen.
The corona crash is changing the world, because — to balance out all the market talk — as Lenin said: “There are decades where nothing happens; and there are weeks where decades happen.”. People will remember how nature looked cleansed of human pollution. Cities will be more willing to impose strict traffic restrictions for combustion cars and people will buy more Teslas and Tesla-like(s). The shift to remote working has already been accelerated by years, if not decades. People will not waste time daily commuting; office space will sharply decline and many will move to suburbs. In a matter of weeks, grandmothers learned to use their iPhones to buy groceries every day.
There are 2 ways to make exceptional investments coming out of the crisis.
You can try to spot inflections — moments which give rise to breakthroughs with generation-changing implications transforming how we function. For example, the corona crash is putting such cosmetic things as data privacy aside. It is no longer an issue that Google is developing a technology to keep track of everyone, all the time. There is a marked easing of restrictions on digital healthcare solutions, and this could give rise to interesting new winners. For example, telemedicine providers in the U.S. may be able to connect doctors with patients across state boundaries. But trying to foresee these future value outliers is a notoriously difficult game, generally restricted to VCs, who themselves like to admit that it is often about luck.
The alternative is to buy companies with moat and enough cash to invest through the crisis. History shows that the demand for certain things comes back after disruption. People will fly again (they did after 9/11), they will eat in restaurants, buy clothes and go to gyms.
Challenge your contrarian self. Investors tend to have a very short muscle memory. The stocks of Amazon, Google, Facebook, Apple have already rallied to levels which look strangely at odds with the doomsday talk on the street. You might think this is dangerous. History shows that every time there’s a consensus among people, market likes to prove them wrong.
Except that it hasn’t done that for over a decade now. There are reasons to think that the market has lost its ability to mean revert, and the corona-crisis will only enhance that trend.
The combination of money printing and low interest rates inflate asset prices; companies can borrow extremely cheaply for share buybacks or acquisitions of other companies, while the value of the collateral they put up is rising. The rise of passive investing puts an automatic bid on a selected number of stocks, whose valuation has become so large that they drive the entire market higher.
This everything bubble has, in the meantime, become vital to the entire system, so that it is in everyone’s interest that things keep swelling. The extent of the easy money in the system has pushed yields to such low levels that the only reason why people keep investing and holding these low-yielding assets is that on paper, they see the value rising due to (again) easy money and low interest rates.
You can see the perversity of this mechanism and say that it is sure to break down, as many do, but if your investment horizon is in years, not decades, there are good reasons why you would want to ride the bubble.
Most of you who take the effort to read this article are a thoughtful, intellectual people. You are predisposed to look for odd patterns and foresee what’s coming, but don’t overthink it. For the next <5 years, the best investment strategy may indeed be to just stay put.
That is, before the world resets.
