Author: Chong Ser Jing

Note: This article was first published in The Business Times on 25 November 2020; data as of 19 November 2020

On 9 November 2020, Pfizer announced a wonderful development for mankind. Trial results from the pharmaceutical giant’s COVID-19 vaccine candidate, developed together with Bio NTech, showed that it could be 90% effective in preventing infection.

A week later, Moderna revealed that its COVID-19 vaccine candidate was 94.5% effective in trials. This was followed by an update from Pfizer a few days later that its vaccine candidate was actually 95% effective .

COVID-19 is still a serious global health threat. Pfizer and Moderna’s vaccines have yet to pass regulatory approvals at the time of writing (19 November 2020). Both companies have said too that they can supply their respective vaccines at scale only in 2021. Pfizer’s vaccine candidate also poses a significant logistical challenge since it needs to be transported and stored at an extremely cold temperature of minus 70 degrees celsius .

But, we can at least see some light at the end of the tunnel now.

A celebration – for some

The stock market welcomed Pfizer’s announcement. In the USA, the S&P 500 index was up by as much as 3.9% in the next trading session following the release of Pfizer’s vaccine trial data, before closing with a 1.2% gain. Singapore’s stock market barometer, the Straits Times Index, climbed by 3.7%. But the warm reception did not extend to all corners of the market. The stock price of e-signature specialist DocuSign sank by 14.7% despite the S&P 500’s 1.2% gain.

There were also painful drops of 13.6% and 17.4%, respectively, in the stock prices of e-commerce software provider Shopify and video conferencing platform Zoom Video Communications. These are just some examples of the sharp stock price declines that many US-listed technology companies faced immediately after Pfizer shared the great news about its COVID-19 vaccine trial.

The future for tech stocks?

COVID-19 has led to restrictions on human movement in many countries around the world. Many technology companies benefitted as their products help people to live, work, play, and consume better from home. In late April this year, Microsoft’s CEO Satya Nadella famously said that he saw “two years’ worth of digital transformation happening in two months”.

As a microcosm of what happened with technology companies, DocuSign, Shopify, and Zoom saw their stock prices jump by between 133% and 577% from the start of 2020 to the end of October.

If Pfizer and Moderna’s vaccines are as effective as their trial results suggest, then COVID-19 could cease to be a worry for society in the near future.

Technology companies would then lose a powerful tailwind. This train of thought, along with the sharp difference in the movement of the broader market and technology stocks after Pfizer’s announcement, may prompt a question among many investors: Should we invest in technology stocks in the post-COVID world?

Better question

From my perspective, many of the tech companies whose stock prices were pummelled after Pfizer’s good news are creating or riding on powerful long-term trends.

For instance, before COVID-19, DocuSign was already providing e-signatures to a growing number of companies. Retail merchants were already flocking to Shopify in droves to create an online or omnichannel retail presence to meet consumer demand. A large and growing number of people and companies were already experiencing the joys of a well-built video conferencing app through Zoom.

From 2017 to 2019, DocuSign’s customer base increased by 57% from 373,000 to 585,000. Shopify’s merchant base jumped by two-thirds from 609,000 to over one million; and Zoom’s customers with more than 10 employees tripled from 25,800 to 81,900 . The trio, and many other tech companies, were growing before COVID-19 because their products and services are superior to how things are done traditionally.

When we’ve solved COVID-19, will the advantages that these technology companies have over the traditional ways still hold? I humbly suggest that this is the better question to ask, compared to whether we should we invest in tech stocks in the post-COVID world. This is because the question hones us in on a key driver of a company’s stock price over the long run: Its business performance. Answering this better question can help us determine if any particular technology company’s product or service will enjoy growing demand in the years ahead. With growing demand comes a higher chance of earning higher revenue, profit, and cash flow.

You will need to figure out your own answer to the better question, but my reply to it is “yes”. Will companies really stop their digital transformation and be content with or revert back to more archaic ways of conducting their business simply because the threat of COVID-19 has been removed? I doubt so.

What lies ahead

Some technology companies aren’t worth investing in because they already or will struggle to grow their businesses meaningfully over the long run. The trick lies in separating the wheat from the chaff.

Technology stocks could also be in for more pain in the months or even the next one or two years ahead. Short-term stock price movements are unpredictable. But as a long-term investor, I’m focused on what the businesses of technology stocks could look like five to 10 years from now. For me, the future looks bright, with or without COVID-19.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in the shares of DocuSign, Microsoft, Shopify, and Zoom Video Communications. Holdings are subject to change at any time.

Ant Group’s massive initial public offering (IPO) was stopped cold in its tracks earlier this week.

Ant Group, a fintech company backed by Alibaba and its co-founder Jack Ma, was supposed to list its shares in the stock exchanges of Shanghai and Hong Kong today. The IPO was slated to raise a mammoth sum of at least US$34 billion for the company. What happened instead was the Shanghai Stock Exchange suspending Ant Group’s listing on Tuesday, followed shortly by the same action from the Hong Kong Stock Exchange.

Ostensibly, Ant Group’s IPO process was stopped after Jack Ma gave a speech during a financial conference in Shanghai in late October. In his comments, Ma had essentially labelled the Chinese financial system and regulations as antiquated. This presumably angered the Chinese government because Ma was quickly summoned for a meeting with the country’s financial regulators. And then came the news of the fintech firm’s stalled IPO.

I see Ant Group’s predicament as a manifestation of the risk of investing in China that investors need to contend with. I’m often being asked about my opinions on investing in Chinese companies. I think there are wonderfully innovative companies in China with tremendous growth prospects that can make for excellent investment opportunities. But will I want to make Chinese companies the majority of my portfolio? No. This is because I think that Chinese companies have to deal with unique political and regulatory risks that companies based in democratic environments do not. And these risks, if they flare up, could easily derail a Chinese company’s business.  

A recent Bloomberg article on the Ant Group IPO-debacle contained the following passage:

“The consequences came this week. On Monday, Beijing’s top financial watchdogs summoned Ma and dressed him down. Beijing also issued draft rules on online micro lending, stipulating stricter capital requirements and operational rules for some of Ant Group Co.’s consumer credit businesses.”

Based on Bloomberg’s reporting, the Chinese government has effectively made it more difficult for Ant Group to grow. But what’s more important is that the Chinese government has appeared to also pull the plug on Ant Group’s IPO for now. I just don’t see how something similar – where a company’s IPO process is killed at the very last minute because the company’s public-face had made some unflattering comments about its home country – can happen in a democratic environment. 

This article is not meant to discuss the investment merits of Ant Group. Instead, it’s simply meant to highlight what I think is a critical risk of investing in China that investors need to know: Chinese companies face unique politically-related risks that are not to be trifled with. And Ant Group just happens to be a prominent example.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have no vested interest in Ant Financial or Alibaba. Holdings are subject to change at any time.

Note: An earlier version of this article was first published in MoneyOwl’s website. MoneyOwl is Singapore’s first bionic financial advisor and is a joint-venture between NTUC Enterprise and Providend (Singapore’s first fee-only financial advisor). This article is a collaboration between The Good Investors and MoneyOwl and is not a sponsored post.

The apparent disconnect between the stock market and the economy is one of the hottest topics of discussion in the finance community this year.

Let’s look at the USA, for example, since it’s home to the world’s largest economy and stock market (in terms of market capitalisation). Due to the ongoing restrictions on human movement to fight COVID-19, the country’s economy inched up by just 0.6% in the first quarter of 2020 compared to a year ago. The second quarter of the year saw the US’s economic output fall by a stunning 9.0%; that’s an even steeper decline compared to the worst quarter of the 2007-09 Great Financial Crisis. Yet the US stock market – measured by the S&P 500 – is up by 4.1% in price as of 30 September 2020 since the start of the year. 

Many are saying that this makes no sense, that stocks shouldn’t be holding up if the economy’s being crushed. But here’s the thing: The stock market and the economy are not the same things, and this has been the case for a long time. 

A walk down memory lane

Let’s go back 113 years ago to the Panic of 1907. It’s not widely remembered today but the crisis, which flared up in October 1907, was a period of severe economic distress for the USA. In fact, it was a key reason behind the US government’s decision to set up the Federal Reserve, the country’s central bank, in 1913.

Here are excerpts from an academic report published in December 1908 that highlighted the horrible state of the US economy during the Panic of 1907: 

“The truth regarding the industrial history of 1908 is that reaction in trade, consumption, and production, after the panic of 1907, was so extraordinarily violent that violent recovery was possible without in any way restoring the actual status quo.

At the opening of the year, business in many lines of industry was barely 28 per cent of the volume of the year before: by mid- summer it was still only 50 per cent of 1907; yet this was astonishingly rapid increase over the January record. Output of the country’s iron furnaces on January 1 was only 45 per cent of January, 1907: on November 1 it was 74 per cent of the year before; yet on September 30 the unfilled orders on hand, reported by the great United States Steel Corporation, were only 43 per cent of what were reported at that date in the “boom year” 1906.”

You can see that there were improvements in the economic conditions in the USA as 1908 progressed. But the country’s economic output toward the end of the year was still significantly lower than in 1907. 

Now let’s look at the US stock market in that same period. Using data published by Nobel-Prize-winning economist Robert Shiller, I constructed the chart below showing the S&P 500’s performance from 1907 to 1917.

It turns out that the US stock market fell for most of 1907. It bottomed out in November of the year after a 32% decline from January. It then started climbing rapidly in December 1907 and throughout 1908, even though 1908 was an abject year for the US economy. And for the next eight years, US stocks never looked back. What was going on in the US economy back then in 1908 was not the same as what happened to its stocks.

There’s no link

It may surprise you, but studies on the long-term histories of stock markets and economies around the world show that there’s essentially no relationship between economic growth and stock prices over the long run. One of my favourite examples comes from asset manager AllianceBernstein and is shown below:

Despite stunning 15% annual GDP growth in China from 1992 to 2013, Chinese stocks fell by 2% per year in the same period. Mexico on the other hand, saw its stock market gain 18% annually, despite anaemic annual economic growth of just 2%. A wide gap can exist between the performance of a country’s economy and its stocks for two reasons.

First, stocks are ultimately driven by per-share earnings growth as well as changes in valuations (how much investors are willing to pay for each dollar of earnings). On the other hand, a country’s economic growth is driven by the revenue growth of all its companies. There can be many obstacles between a company’s revenue growth and earnings growth. Some examples include poor cost-management, dilution (where a company issues more shares and lowers its per-share growth), and regulatory pressures (such as a company facing an increase in taxes). Second, the presence of revenue growth for all companies in aggregate does not mean that any collection of companies are growing. 

What this means is that if we’re investing in stocks, it’s crucial that we focus on companies and valuations instead of the economy. This brings us to the situation today.

Underneath the hood

We have to remember that when we talk about the stock market, we are usually referring to a stock market index, which reflects the aggregate stock price movements for a group of companies. For example, the most prominent index in the USA is the S&P 500, which consists of 500 of the largest companies in the country’s stock market. There are two things worth noting about the index:

1. The American economy has more than 6 million companies, so the S&P 500 – as large as it is with 500 companies – is still not at all representative of the broader picture.
2. The S&P 500’s constituents are weighted according to their market cap, meaning that the companies with the largest market caps have the heaviest influence on the movement of the index.

According to the Wall Street Journal, the S&P 500’s five largest companies in the middle of January 2020 – Apple, Microsoft, Alphabet, Amazon, and Facebook – accounted for 19% of the index then. Here’s how the five companies’ businesses performed in the first half of 2020:

Although the US economy did poorly in the first half of this year, the S&P 500’s five largest companies in mid-January 2020 saw their businesses grow relatively healthily. What’s happening in the broader economy is not the same as what’s happening at the individual company level, especially with the S&P 500’s largest constituents. From this perspective, the S&P 500’s year-to-date movement (the gain of 4.1%), even with the gloomy economy as a backdrop, makes some sense. 

In fact, the recent movement of stocks makes even more sense if we dig deeper. On 4 August 2020, Bloomberg published an article by investor Barry Ritholtz titled Why Markets Don’t Seem to Care If the Economy Stinks. Here are some relevant excerpts from Ritholtz’s piece:

“Start with some of 2020’s worst-performing industries: Year-to-date (as of the end of July), these include department stores, down 62.6%; airlines, off 55%; travel services, down 51.4%; oil and gas equipment and services, down 50.5%; resorts and casinos, down 45.4%; and hotel and motel real estate investment trusts, off 41.9%. The next 15 industry sectors in the index are down between 30.5% and 41.7%. And that’s four months after the market rebounded from the lows of late March…

…Consider how little these beaten-up sectors mentioned above affect the indexes.  Department stores may have fallen 62.3%, but on a market-cap basis they are a mere 0.01% of the S&P 500. Airlines are larger, but not much: They weigh in at 0.18% of the index. The story is the same for travel services, hotel and motel REITs, and resorts and casinos.” 

It turns out that the companies whose businesses have crashed because of COVID-19 have indeed seen their stock prices get walloped. But crucially, they don’t have much say on the movement of the S&P 500.

Conclusion 

Stock market indices are useful for us to have a broad overview of how stocks are faring. But they don’t paint the full picture. They can also move in completely different directions from economies, simply because they reflect business growth and not economic growth. The main takeaway is that when you’re investing in stocks, don’t let the noise about the economy affect you from staying invested as they don’t always move in the same direction. If you invest in stocks, look at companies and not the economy.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in the shares of Alphabet, Amazon, Apple, Facebook, and Microsoft. Holdings are subject to change at any time.

Warren Buffett is one of my heroes, not just in investing, but also in life. On 30 August 2020, he turned an amazing 90 years old. But as his dear friend Bill Gates notes, Buffett still “has the mental sharpness of a 30-year-old, the mischievous laugh of a 10-year-old, and the diet of a 6-year-old.”

To celebrate Buffett’s extraordinary life, I want to share a few of my favourite stories about him.

Story 1: Philanthropy and the meaning of wealth

In August 2014, Buffett, together with his friends Bill and Melinda Gates, created The Giving Pledge, a movement that encourages society’s wealthiest individuals to pledge the majority of their immense wealth to philanthropic causes. The Giving Pledge started with 40 of America’s wealthiest people and today includes more than 200 families from 23 countries. The Giving Pledge has its roots in Buffett’s decision in 2006 to gradually give all of his wealth to philanthropic foundations. As part of The Giving Pledge, Buffett has committed to giving more than 99% of his wealth to philanthropy during his lifetime or at his death. According to a July 2020 New York Times article, Buffett has donated at least US$37 billion to philanthropic causes since his 2006 pledge. 

For me, the admirable actions of Buffett and the Gateses are a reminder to myself that the accumulation of wealth gains meaning only if it’s used to better the lives of others and not for purely hedonistic personal enjoyment. 

Story 2: Trust

In 1983, Buffett acquired 90% of The Nebraska Furniture Mart from the then-89 year-old Rose Blumkin (popularly known as Mrs B) for US$55 million. When he made the acquisition, he did not request for an audit of Nebraska Furniture Mart’s business, take an inventory, verify the receivables, nor check the company’s property titles. The contract was just over one page long. 

Buffett had full trust in Blumkin’s character. It’s easy to see why. In 1950, Blumkin was sued by competitors who complained that she was engaging in unfair trading by offering low prices for furniture to consumers. This is how she responded: 

“I went to Marshall Field in Chicago. I tell them I need 3,000 yards of carpet for an apartment building — I got, actually, an apartment building. I buy it from Marshall Field for $3 a yard, I sell it for $3.95 a yard. Three lawyers from Mohawk take me into court, suing me for unfair trade — they’re selling for $7.95. Three lawyers and me with my English. I go to the judge and say, ‘Judge, I sell everything 10 percent above cost, what’s wrong? I don’t rob my customers?’ He throws out the case. The next day, he comes in and buys $1,400 worth. I take out an ad with the whole case and put it in the Omaha World-Herald: ‘Here’s proof how I sell my customers.” 

I have a firm belief that it’s hard to make a bad deal with a good person no matter how poorly-written the contract is. I also believe it’s equally hard to make a good deal with a bad person, no matter how strong the contract is. Buffett’s experience with Mrs B taught me so.

Story 3: Patience   

In July 2020, I published the article, The Fascinating Facts Behind Warren Buffett’s Best Investment. It discusses Buffett’s investment in The Washington Post Company (WPC), now known as Graham Holdings Company, in the 1970s. 

It’s one of my favourite Buffettt stories for two reasons. First, Buffett’s WPC shares gained over 10,000% from the 1970s to 2007, making it one of the best – if not the best – investments he has ever made. Second, WPC’s share price actually fell by more than 20% shortly after Buffett invested, and then stayed there for three years.

To achieve great returns in stock market investing, patience is almost always a necessity. Buffett’s investing results show exactly why.  

This article will never be seen by Warren Buffett, but I hope my birthday wishes for him can still be received by him in some way or another. Happy 90th birthday, Mr Buffett! Stay healthy and strong, always!

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. 

There are two kinds of problems in this world: puzzles and mysteries. Puzzles can be solved by collecting information. Mysteries, on the other hand, require insight – they can’t be solved simply with more information.

Here’s writer Malcolm Gladwell explaining the difference between a puzzle and a mystery in a 2007 article:

“The national-security expert Gregory Treverton has famously made a distinction between puzzles and mysteries. Osama bin Laden’s whereabouts are a puzzle. We can’t find him because we don’t have enough information. The key to the puzzle will probably come from someone close to bin Laden, and until we can find that source bin Laden will remain at large.

The problem of what would happen in Iraq after the toppling of Saddam Hussein was, by contrast, a mystery. It wasn’t a question that had a simple, factual answer. Mysteries require judgments and the assessment of uncertainty, and the hard part is not that we have too little information but that we have too much. The C.I.A. had a position on what a post-invasion Iraq would look like, and so did the Pentagon and the State Department and Colin Powell and Dick Cheney and any number of political scientists and journalists and think-tank fellows. For that matter, so did every cabdriver in Baghdad.”

I believe investing is a mystery, and not a puzzle. There are seldom clear-cut answers in the financial markets. 

Investing is a mystery-problem to me because you can have billionaire investor Bill Ackman invest in a company (formerly Valeant Pharmaceuticals, now Bausch Health Companies) after conducting such deep research that he had to sign confidentiality agreements and yet have the company’s share price do this:

The slide below shows the extent of the due-diligence that Pershing Square (Ackman’s investment firm) conducted on Valeant:

I’m not trying to have a dig at Ackman. I have immense respect for his long-term accomplishments as an investor. I’m using his experience with Valeant because I think it is a wonderful example of the puzzle/mystery dichotomy in investing. Having a mountain of information on Valeant had no use in the eventual outcome that Pershing Square had with the company. 

Investing is a mystery-problem to me because you can give two great investors the exact same information about a company and they can arrive at wildly different conclusions about its investment merits. 

Credit card company Mastercard currently has 39 analysts covering its stock, according to its own website. Its market capitalisation is more than US$330 billion right now and it was never below US$200 billion at any point over the past year. It’s very likely that the investing community knows all there is to know about Mastercard’s business. 

Chuck Akre runs the Akre Focus Fund, which had generated an impressive annual return of 16.8% from inception in August 2009 through to 30 September 2019. Over the same period, the S&P 500’s annual return was just 13.5%. Mohnish Pabrai is also a fund manager with a fantastic long-term record. His return of 13.3% per year from 1999 to 30 June 2019 is nearly double that of the US market’s 7.0%.

At the end of September 2019, Mastercard made up 10% of the Akre Focus Fund. So Akre clearly thought highly of the company. Pabrai, on the other hand, did not want to touch Mastercard even with a 10-feet barge pool. In the October 2019 edition of Columbia Business School’s investing newsletter, Graham and Doddsville, Pabrai said:

“Is MasterCard a compounder? Yeah. But what’s the multiple? I can’t even look. Investing is not about buying great businesses, it’s about making great investments. A great compounder may not be a great investment.”

Investing is a mystery-problem to me because even the tiniest investment firms can beat the most well-staffed ones.

I once spoke to an employee of a US college endowment fund with an excellent history of investing in fund managers who go on to produce stellar long-term results. During our conversation, I asked him what was the most surprising thing he found about the best fund managers his endowment fund had worked with. He said that the fund managers with the best results are the one or two-man shops. If investing is a puzzle-problem – meaning that collecting information is the key to success – there is simply no way that the two-man-shop fund manager can beat one with 50 analysts. But if investing is a mystery-problem – where insights matter the most – then you can have David triumph over Goliath.   

So what are the key implications for investors if investing is a mystery and not a puzzle? I have one. 

Investing can never be fully taught. There are the technical aspects of investing – such as how to read financial statements and the workings of the financial markets – that can be learned. But there will come a point in the research process where the collection of more information will not help us, where insight is necessary. And the development of insights, unfortunately, can’t be transmitted from teacher to student. Insights depend on an individual’s life experiences and knowledge-base. The books I’ve read are different from the ones you have. Even for the same books, our takeaways can be wildly different.

I believe one can become a competent investor by following rote methods. But to become a great investor, I don’t think there’s any manual that can be followed, because investing is a mystery, not a puzzle.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We have a vested interest in Mastercard shares.

Note: This article was first published in The Business Times on 29 July 2020.

It may feel like a lifetime has passed, but it’s only been around seven months since COVID-19 emerged and upended the lives of people all over the world. 

Given the short span of time, I don’t think there can be many definitive investing lessons that we can currently draw from the crisis.  But I do think there are already key lessons we can learn from. At the same time, we should be wary of learning the wrong lessons. 

A mistaken notion

As of 21 July 2020, the S&P 500 index – a broad representation for US stocks – is flat year-to-date. Meanwhile, the Nasdaq – a tech-heavy index of US-listed companies – is up by more than 17% in the same period. Even more impressive is the BVP Nasdaq Emerging Cloud Index’s 55.5% year-to-date gain. The BVP Nasdaq Emerging Cloud Index is created by venture capital firm Bessemer Venture Partners and it is designed to track US-listed SaaS (software-as-a-service) companies.

The huge gap between the performances of the S&P 500 and the Nasdaq and Bessemer’s cloud index is not surprising. 

Large swathes of the physical economy have been shut or slowed down because of measures that governments have put in place to stamp out COVID-19. Meanwhile, companies operating in the digital economy are mostly still able to carry on business as usual despite lockdowns happening across the world. In fact, COVID-19 has accelerated adoption of digital technologies.

Given this, it’s easy to jump to the following conclusion: A key investing lesson from COVID-19 is that we should invest a large portion of our portfolios into technology stocks. But I think that would be the wrong lesson.

We have to remember that crises come in all kinds of flavours, and they are seldom predictable in advance. It just so happened that COVID-19 affected the physical world.  There could be crises in the future that harm the digital realm. For instance, a powerful solar flare – an intense burst of radiation from the sun – could severely cripple our globe’s digital infrastructure.

I think there are two key investing lessons from COVID-19.

In the face of adversity

First, we should invest in companies that are resilient – or better yet, are antifragile – toward shocks. Antifragility is a term introduced by Nassim Taleb, a former options trader and the author of numerous books including Black Swan and Antifragile. Taleb classifies things into three groups: 

• The fragile, which breaks when exposed to stress (like a piece of glass, which shatters when dropped)
• The robust, which remain unchanged when stressed (like a football, which does not get affected much when kicked or dropped)
• The antifragile, which strengthens when exposed to stress (like our human body, which becomes stronger when we exercise)

Companies too, can be fragile, robust, or even antifragile. 

The easiest way for a company to be fragile is to load up on debt. If a company has a high level of debt, it can crumble when facing even a small level of economic stress. On the other hand, a company can be robust or even antifragile if it has a strong balance sheet that has minimal or reasonable levels of debt.

During tough times (for whatever reason), having a strong balance sheet gives a company a high chance of surviving. It can even allow the company to go on the offensive, such as by hiring talent and winning customers away from weaker competitors, or having a headstart in developing new products and services. In such a scenario, companies with strong balance sheets have a higher chance of emerging from a crisis – a period of stress – stronger than before. 

Expect – don’t predict  

Second, when investing, we should have expectations but not predictions. The two concepts seem similar, but they are different. 

An expectation is developed by applying past events when thinking about the future. For example, the US economy has been in recession multiple times throughout modern history. So, it would be reasonable to expect another downturn to occur over the next, say, 10 years – I just don’t know when it will happen. A prediction, on the other hand, is saying that a recession will happen in, say, the third quarter of 2025. 

This difference between expectations and predictions results in different investing behaviour.

If we merely expect bad things to happen from time to time while knowing we have no predictive power, we would build our investment portfolios to be able to handle a wide range of outcomes. In this way, our investment portfolios become robust or even antifragile.

Meanwhile, if we’re making predictions, then we think we know when something will happen and we try to act on it. Our investment portfolios will thus be suited to thrive in only a narrow range of situations. If things take a different turn, our portfolios will be hurt badly – in other words, our portfolios become fragile.

It should be noted too that humanity’s collective track record at predictions are horrible. And if you need proof, think about how many people saw the widespread impact of COVID-19 ahead of time.

Conclusion

There will be so much more to come in the future about lessons from COVID-19.  We’re not there yet, but I think there are already important and lasting ones to note. 

My lessons rely on understanding the fundamental nature of the stock market (a place to buy and sell pieces of actual businesses) and the fundamental driver of stock prices (the long run performance of the underlying business). 

COVID-19 does not change the stock market’s identity as a place to trade pieces of businesses, so this is why I think my lessons will stick. 

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.