By Tadiwanashe Dzuda
Crises are a part of what it means to be alive. Within all of our lifetimes, we will experience a wide range of events that shake things in a very big way. COVID-19, unlike previous crises as recorded in recent history, has come with an extreme punch on two fronts. Firstly, on our personal wellbeing and health systems, secondly, our economies and livelihoods. Though both events are individually not new to humanity, the intertwining of the two in this current manner is definitely something that many have considered being rare.
This article primarily focuses on the economic and monetary aspects of the crisis. Below are my brief observations of the human reactions and the effects of those reactions by key players on the COVID-19 crisis and how one could potentially make investment decisions during this uncertain time. The key question that drove me to take time out and objectively asses the current situation is centered around, how one should consider the building and preservation of wealth in a seemingly uncertain world.
Below are my seven (7) observations and potential considerations for investing or making investment decisions during a crisis.
One: Never waste a good crisis. It is true that in difficult and uncertain times most people pay the most attention to the risks than the opportunities, that at such times opportunities are greatest. Unfortunately, there is also often another group that is overly ambitious and misguided which goes out buying and selling everything, therefore, risking their ruin. So remember, when you don’t know what to do, do nothing.
“Look for the upside whilst keeping the downside (Risk of Ruin) well within your control.” — Ray Dalio
Two: Pay attention to Central Banks. In a crisis, due to pressure from the markets and overall economy, central banks are called upon to make big moves. In such times they have often historically resolved to do two main things in order to ease the impact of any crisis. Firstly, cut interest rates and secondly, launch quantitative easing programs(QE). The main goal is to provide liquidity into the increasingly dry markets and attempt to uphold the supply and demand dynamics. This often causes big shifts in the market especially, as it regards long term asset value. Therefore, in principle, it’s worth paying attention to the financial assets central banks will be actively purchasing during such times.
Three: Breathe, and take it one day at a time. Instability and extreme volatility are the game of the day so make time conscious plays and understand your fundamentals i.e. market movers.
Four: Place your bets two, three or even four steps down from the noise. The action often isn’t necessarily where the most noise is. A good example would be airline stock. Due to COVID-19’s global spread, travelling has decreased immensely and America’s top four airlines have lost approximately 35–40% of their cumulative value. But, what do people who fly also need? Hotels! Marriot Group and many other hotel stocks have lost a lot of value. But, how do they get to their hotels? Rental Cars! Avis Budget Group has also seen major stock losses. In contrast ZOOM communications, a tool used by offsite teams, Amazon, and Netflix among many others have substantially increased in value. Remember, both are opportunities. Some to buy and some to sell.
Five: Have a principled understanding of the situation at hand. How you play your bets is often a result of your assumptions about what is going on and how to react to that reality. e.g. If you believe the markets are doomed you will most probably sell off most of your positions. Contrary, if your view is that this is merely a pullback or you believe in cycles, your bets will probably be a bit different, you may wait on a few positions a bit longer. My view has largely been shaped by Ray Dalio’s philosophy around investing which is (simply put), look to history and see how similar events have played out, study how different players reacted, the effects that had on certain asset classes and how this may play out today given your current situation. It’s important to determine what the best framework for understanding your situation is and which signals will indicate what, otherwise you will be hopping from one opinion to the other.
Six: Balance Sheets and Liquidity Matter. In other words, you want to favour the companies that have the means to weather the storm. Sure, Apple sales might be relatively low right now but one can be certain that they are a healthy enough company to at least, financially, survive in the long term despite short term losses. Secondly, you also want to watch out for and potentially stay away from over-leveraged firms (companies with a lot of debt). This exercise requires a bit of intentionality and research but you can find most of the required information on the internet and see which companies are healthy and have better odds of weathering the storm.
Seven: Lastly, Look for “safe havens”. Each crisis has winners and losers as history has shown. Picking these is often a difficult iterative process, regardless there are always a few safe havens and more long term assets that one can rely on. Gold as an example has generally performed steadily (cumulatively) during major crises, COVID-19 included. Making it one of a few key assets to potentially own during rocky and uncertain times. Locations, whether this is specific countries or regions can also be safe havens, often when the world goes through a major crisis there a few places in which things are not as intense and chaotic, diversifying investments by location can act as a protective measure.
As the world continues to grapple with COVID-19, my hope is that we may continue to ask the necessary questions and self introspect. The next time this comes around we ought to be better prepared to deal with such a crisis. My prayers go out to all the frontline workers, families around the world who are unable to make ends meet and global leaders who have the impossible task of managing such a difficult situation.
Tadiwanashe Dzuda has a keen interest in Finance, Private Equity and Development. He is a student member of the Chartered Institute of Securities and Investments (CISI). He is extremely passionate about creating systems that enable prosperity and development in Africa. You can connect with him on these platforms:
Medium – @tadiwanashedzuda
Twitter – @tadiwadzuda