- The Economic destruction by pandemic
- The immediate aftermath of COVID on various asset classes.The Great disconnect of the Stock Market with the reality- FOMO ( feeling of missing out)
- Cash & Gold
- Rational investors Strategy
- How should we go about investing in Equities?
- How should we look at fixed income investing?
The Economic destruction by pandemic
We find ourselves in this perfect storm, as the pandemic has hit us like Tsunami and caught us by surprise when we were bathing in the sunshine of global growth. Almost 14.6 million are infected and approx 608000 plus perished and the numbers rising by the day.
The estimated economic losses run in trillions of dollars.
Is there a technique to invest in these times and come out unscratched? What would a sane individual investor do in chaos in and Around?
No Asset Class is spared
No Asset class was spared when the pandemic unleashed its ugly teeth spitting venom in March we saw equity saw cut to the tune of 15-20%, Low-grade Bond/ credit Risk Funds have also been decimated with the Franklin Mutual fund unwinding 6 of its debt schemes in India, FD’s have lost the sheen.
My phone keeps on buzzing and folks inquire about the health of their Bank. Neither will I harp on the magnitude of the situation that we are in nor will I throw numbers to depress you.
The Great disconnect of the Stock Market with the reality-FOMO
When will the stock market correct? Is a question on everyone’s mind. The run up which is seen in Equities on the hope of a vaccine has just strengthened the feeling of being missed out/FOMO is very high
In times like these, we see the stock market flying on its own and has not decided to stop moving unidirectionally northwards. In terms of valuations, we saw the lowest levels on Market Cap as a %GDP of 56 in March 2020 which has again risen to 68, long term average been 75 and high being 149.5.
So how would a rational investor react in these irrational times where we see the world economy is collapsing like ninepins and stock markets are not in sync with reality?
Cash & Gold
Should one sell everything and move all assets to Gold?
#WarrenBuffet once famously said something about Gold that still resonates with me. You collect all the available Gold and dump it in a room it will continue to shine nicely, won’t produce a dime of dividend, can’t give you pennyworth of interest, and won’t be keen on paying any rent.
Yes, it can act as a good hedge against losing faith on USD but not for long and make no mistake a portion of allocation is a good prescription but one must refrain from an overdose.
I also saw the tendency of lot many longterm seasoned investors pulling the trigger and move a large portion of their holdings to cash, though might look like a prudent move to defend oneself from a crashing market, but in long term, the terminology of cash is thrash holds as inflation eats into returns every single day and purchasing power of each dollar goes down. Now many economies like India may face stagflation going forward.( A phase of high inflation and low growth)
Don’t get me wrong I am not defying both these asset classes nor am I advocating a disproportionate allocation to Gold and Cash. What point I am stressing on is sticking to consistent long term asset allocation. And these words might sound clichéd and at the cost of sounding like a broken record, this is the only thing that helps us achieve long term and consistent optimal returns.
Read More When Should one invest in Gold?
Rational investors Strategy
Now that beans are spilled and there is no magic portion for COVID proof Investing, let’s dig deep where should I spread my eggs:-
I have developed a framework borrowed a bit from Charles Darwin himself based on the survival of the fittest theory.
No matter what vehicle or broader asset class( Common Stock or Bonds ) you use for investing it doesn’t matter, we eventually are owners in the business or lenders to them. ( This one sentence sums up the entire philosophy developed by, Buffet, Benjamin Graham, Howard Marks )
if you reread the above line it just forces every single brain cell in your mind to think #LongTerm. Coming back to the survival of fittest following business could survive the acid test of COVID.
How should we go about investing in Equities?
I will look at the following parameter for Equity investing:-
1. Business with Low/No or manageable debt. ( Interest is one fixed cost that can break the back of the camel no matter how cheap the cost be ).
2. Businesses whose products will have a strong demand and will continue to be consumed post-COVID era and should have products and services that are irreplaceable.
3. Strong balance sheets will survive better than weak ones as in the coming months the stress on Income statements would be extended to Balance sheets.
4. Businesses that have strong free cash flows. ( Money left covering fixed cost+ Taxes+ Capital expenditure etc. and adding back depreciation to shareholders kitty)
5. Good Managements that are efficient allocators of capital and not those who indulge in high cash burn. (High Return on Equity & Return on capital employed) .
6. Deploy capital in a staggered way don’t try heroics no one catches the bottom nor will you miss the bus, just stay put and average. ( SIP’s and STP’s are the right way to accumulate)
Read More on When should a long term Investor sell stocks?
How should we look at fixed income investing?
Debt Investing I am clear I won’t be pennywise pound foolish, for extra bps won’t do the following things:-
1. Invest in High Credit Risk Funds. ( This is a big ticking time bomb which has imploded during IL&FS Crisis and can explode during COVID, Franklin was just a precursor)
2. But long-duration Govt Security Bond Funds. ( It might sound safe that you are buying sovereign debt, the real fact of the matter is COVID situation and extended lockdown can put pressure on Country’s finances and may lead to inching of long bond yields that may cause a lot of volatility.)
3. Avoiding NBFC Fixed deposits ( Irrespective of good names we are better of avoiding this space as FD’s are very inefficient from a taxation perspective.
All in all the secret sauce for COVID lies in discipline, rationality, and staying put and calm. Remember Investments are just like Marathon you got to pace them!