What the pandemic is teaching us

As I am writing these lines, we are into the 8th month of the pandemic. And as this year has only 9 more weeks left before coming to a painful end, it doesn’t look like the pandemic would stop there. We are in for a long and rough ride ahead with several more months to get through.

But every challenge bears also opportunities, and during these 8 months, there were already plenty of lessons for us to remember for the future ahead. Especially when it comes to our jobs and finances.

Lesson 1: There is no such thing as job security

The first lesson was to recognize that there is no such thing as “job security” when a real crisis hits. Given how our economies are connected and intertwined worldwide, any crisis that comes on a global scale is likely to effect employees and business owners everywhere and in almost every industry.

This pandemic showed us how quickly companies find ways to reduce staff counts and reduce payrolls. Whether people get furloughed, put on unpaid leaves, or forced to accept pay-cuts. When a crisis hits, people suffer. So one would do better preparing for such an eventuality.

Lesson 2: Emergency funds make sense

I wrote about emergency funds before, but let me repeat it again: Everyone should have an emergency fund that covers 3-6 months worth of expenses. More cautious types might even consider saving for up to 12 months.

Having an emergency fund won’t negate your worries when a crisis hits, but it will certainly ease them. Knowing that you don’t need to panic when the next rent or utility payment is due is already a huge relief. Not having the immediate pressure or struggle to afford your regular daily, weekly, and monthly expenses will keep your head clear and allow you to focus on finding the right solution to the challenge at hand, without the pressure or need to compromise on less adequate opportunities.

Lesson 3: One source of income is not enough

It’s good to have an emergency fund, but to increase your defenses even further, you should also not rely on a single source of income. Creating multiple income streams is a critical step not only for those who plan to retire with a better standing but also for those who want to prepare for emergencies.

Lesson 4: Be prepared to help others

If you have an emergency fund, additional sources of income, and are even able to keep your job while a crisis is spreading across the globe, then you have generated a unique opportunity for yourself: You can protect yourself and those in your care, and you might also be able to support others.

A friend in need, a local shelter for the homeless, or an orphanage. There is always someone in need. Whether it’s money, food, or clothes. Giving feels good, and even more so in such a difficult time.

Keeping investing in difficult times

There is a lot of “happy talk” from governments around the world promising a swift recovery and promoting a way back to a “new normal” on the immediate horizon. However, when listening to politicians we always need to keep in mind what their incentives are. Politicians have a vast interest in painting positive pictures because their positions and their re-elections might depend on it.

In times of crisis, it is better to listen to other voices, and in particular to businesses. Not to their press releases, which are also often overly positive to keep investors patient and calm. The more relevant information is flowing in the background: Are they hiring people or did they freeze their payrolls? Are research and development projects being continued? Did they request their financial partners to extend credit lines? Are assets being sold off or do they continue to add value with acquisitions? Are they scrambling to get through the crisis, or do they take the opportunity to eradicate weak-points in their business models?

You don’t need to DO the research

For large companies, you can trust that somebody is doing this research for you. Financial magazines, newspapers, analysts, online blogs. There is a lot of work being done by many people out there. All you need to do is to find this research, to read it, to evaluate it, and after reading a few of these sources, to form an opinion based on the information you received.

You can do this for individual companies, but as an investor, you definitely should do this for entire markets. The world’s most famous and successful investors read a lot, and the majority of what they read are assessments, opinions, and evaluations of products, services, trends, and opportunities.

People like Warren Buffett, Bill Gates. You don’t need to like them or to necessarily agree to their ideas and positions. But you should acknowledge that they have a significant amount of knowledge about what is happening in the world. They use this knowledge for their decision-making process, where to invest, which project to support. Which idea or business model, or charity offers the best chance of success, adding value to the market, to investors, and to potential customers or recipients of the product or service.

The picture is pretty bleak

Looking at what is happening in the markets right now, the picture is pretty clear. And pretty bleak. We are in a recession, one that might last a few years.

Almost every colleague of mine is on a salary cut, furloughed, or anxious that he might get into a challenging situation in the next few months to come. Companies in the travel sector are obviously heavily impacted, but also other sectors experience similar challenges. Job cuts, sales of assets, and project delays are mentioned daily basis in newspapers around the world. And while some economies started to slowly re-opening, cash-flows are still very far away from where they were in 2019. The numbers for the first half of 2020 will come in and will be reported in the next weeks to come, and it’s pretty safe to say that there will be some shocks ahead to those who kept listening to the happy talks of politicians.

All this doesn’t mean that you should stop investing

As I mentioned in a previous article, this could nevertheless be a great opportunity for investors. Every crisis has survivors and losers. And survivors usually come out stronger every time when they are challenged and pushed to improve, to re-invent, and to innovate. From my point of view, this crisis has pushed us into new investment territories by emphasizing the importance of sectors that were neglected in the past.

Technology is already a clear winner (again), but it’s worth taking a deeper look into it. Some areas of technology will shift into a stronger focus than others. Cybersecurity for example is such a sector. Work and freelance platforms are another.

Producers of hygiene products and business which focus on health & safety can expect long-term benefits for the years to come. But the same goes for companies which not many had on their radar like waste management systems, and water supply and filtration technologies. You know where all your germs go to every time you shower or visit the toilet, right?

Plenty of opportunities in every crisis

When you read enough, gather a sufficient amount of information and knowledge, and adapt your thinking to understand that there are opportunities in every challenge, then you will quickly realize that, crisis or not, there is no reason to ever stop investing.

The only limitation I would see is when you are running out of time. When you get old. But by that time, your portfolio should be the last worry you have. By that time, I would hope that you have had a successful investment history and that you can happily retire on your monthly dividend income.

The next downturn is coming

The last few weeks have been pretty interesting. First the stock market crashed. Then it started to rise and became “the most hated rally” in history. And now it’s back to crash again.

What I did over the recent weeks was observing which shares were rising and falling faster than others, and I did make some purchases. For most parts I bought shares of companies in the tourism and real estate sector, which fell dramatically, but which also show the most promise of rising back up swiftly once the real recovery starts.

The real recovery might take time

But indeed, the real recovery might take much longer than people, and the market, are anticipating right now. Since I work in the hospitality sector, I know very well the projections, and the expectations we are facing in the real world. And the stock market will adjust to these realities at some point.

The swings up and down right now are really extreme and show that many trades are being executed on impulse, on emotions. But in a few weeks these sporadic reactions will reduce, and real data will take over. The crazy daily swings will become moderate, and we will get back into a more stable trend.

The big question is of course whether it will be a positive, or a negative trend. And it’s really hard to determine, but personally I still expect an overall market downturn, because the recovery will take time.

The service industry is crucial – and so are spending habits

The service industry includes hospitality of all kinds. Hotels, bars, restaurants. And these businesses form not only the largest employment sector on the planet. They are also based on the idea of bringing people together. Sitting together. Spending time together.

Given that the behaviour of people has been altered due to the current pandemic, and also that it won’t likely change significantly unless there is a vaccine or cure, it’s therefore probably realistic to assume that a real recovery can only begin when this problem is solved.

Now a workable vaccine may come sometime by the end of this year, more likely during the 1st or 2nd quarter of 2021. Also, there is a high chance that the first generation of the vaccine won’t be as successful as some investors might think. The reason is simple: The first generation of vaccines is usually not the best one.

Given all these details, I would rather see any meaningful recovery to begin around the 3rd quarter of 2021. And until then, people will keep losing jobs, spendings will be marginal, travel will be restricted, and cash-flows will remain on the lower levels. Less spendings means lower revenues, lower profits, lower investments, fewer jobs, … you get the picture.

Good time to start investing

But again, as mentioned in this previous article, it might be a great opportunity for many people to start investing. While the short- and medium-term might look insecure, the long-term prospects are still in favour of investors.

Buying great companies at a fair price

Yesterday I watched an interview with Warren Buffett. It was actually from February this year, but I hadn’t that much time to focus on such a long single video then. The interview went on for over 2 hours. Now, with working from home and my hotel closed, this was an opportunity to seize.

Warren Buffett is a fascinating individual. Humble, simple, outspoken but more than often speaking in riddles. I watched several of his interviews and speeches in the past and what strikes me every single time is that he constantly keeps repeating the same 2 core messages.

His first recommendation for the average investor is to simply purchase an index fund. Not spending too much time with picking individual stocks. Not pretending to be smarter than the market by spending hours and hours analyzing shares with some sophisticated metrics. Especially when this time can be better spent doing something else.

For those who prefer to purchase individual shares, however, he does have a second piece of advice. And he keeps repeating this one over and over for many years.

Buy a great company at a fair price

As people who don’t understand the stock market like to refer to it as just another form of gambling, the fact of the matter is that when we purchase shares, we are actually becoming co-owners of that particular business. We are taking a stake in that particular venture, for the good and for the bad side of it. Warren Buffett puts, therefore, the investment thesis down to a simple formula: Do you believe that the business you want to buy will exist and do better in 10, 20, or 50 years from now?

If the answer is yes, then you should invest in it. Of course, you should still do your due diligence, research some more details about the management, structure, and check on the valuation, but these are not the key factors. The first thing to clarify is whether the company has a solid business model, whether it offers solutions to problems people have and will remain to have, and if it’s smart enough to do it in a sustainable and profitable way.

Obviously, this is not the “get rich fast” approach. And as he once famously stated, his advice is being constantly disregarded or misinterpreted because “nobody wants to get rich slowly“. Nevertheless, this approach is what real investing is all about and how he became one of the richest people on the planet.

There are always great companies at a fair price – but especially so during a recession

Every crisis offers opportunities for smart investors. With markets in panic mode, stock prices of even the best companies are often being dragged down together with the rest of the market. The now expected recession and downturn will be no different. It might be therefore a good idea to put some cash aside, and to closely observe companies that you believe have a bright future ahead. It might be your opportunity, to purchase a great company at a fair price.

Unchartered Waters

Things are looking grim. As economies across the globe are setting record after record on rescue-efforts for companies and individuals alike, more people get infected and are dying by the hour. Here where I live in South East Asia, things look currently like this:3580795

But, this is not a medical blog, it’s about personal finance. So let’s talk briefly about the spread of the virus as shown above, and what it means for our personal finances.

Unemployment is on the rise

Two weeks ago, I had one of the most difficult moments of my entire career. I sat down with 25 team members, explained to them what is happening with the tourism industry, and then told them that I have no choice but to let them go. They were not full-time employees with my hotel. They worked for an outsourced supplier on a temporary contract. I worked with them since the hotel opening last year and they proved to be a dedicated and hard-working team that would always do their best.

And yet I had no choice. With the operational losses mounting up day by day, a full hotel closure became a realistic expectation, which would put all of my 60 employees on the street. No matter how many tears I would shed, there was simply nothing else left where I could cut costs to keep the ship afloat.

It was hard. But I also know, I am not the only one. In my area here in Pattaya almost 20 hotels already closed their doors. 20 hotels that I know of. On top of that, bars, restaurants, coffee shops, massage parlors. Empty. Thousands of people are now either unemployed, on leave without pay, or on leave with reduced salaries.

In the USA, last week alone more than 3,2 million people filed for unemployment – within a week! Just imagine that. A country that just celebrated being once again the strongest economy in the world, had a sudden jump in unemployment by the millions.

The same is happening all across the globe. And my industry is being hit the hardest. Hotels, restaurants, and bars employ 1 out of 10 people worldwide. We are the single largest employment industry across the globe. And we are being hit the hardest by people staying at home.

No Money, No Spending, No Income, No Taxes, No Profits

Don’t get me wrong. We need people to stay at home. Because we also can’t afford to get sick. Most of us work on minimum wage. Many of us have limited or no insurance. And many of us have no savings. No financial security to speak about.

This means that once people are sick and unemployed on a large scale, they obviously stop spending money. This leads to other businesses losing income, scaling down and ultimately profits across all industries start to dwindle. If this lasts for as little as even only a few weeks, chances are high that this turns into the beginning of a recession.

No money means no Spending. No spending for some means no income for others. This will result obviously in no taxes paid and cripple public budgets. It also cripples private businesses cash-flows and profits. Investors will therefore start observing a lot of companies losing value. Stocks start to slide and portfolios turn red. Except in China, where the colors for positive and negative are reversed.

Unchartered Waters

We had recessions before and so far, we always found a way out of it. After every recession there was a bull market that would usually rise higher and beyond expectations.

History is a great advisor, but there are no guarantees. There are just so many things that we don’t know. We don’t know how long this pandemic will endure. We don’t know, how a shut-down of the economy on such a large scale will affect our economy in the long-run. We also can’t reliably estimate which sectors will be dragged down together with the most obvious losers.

But there are reasons to be optimistic. Every recession is like a clean-up. Bad and mismanaged companies get quickly in trouble and are either bailed out or forced out of the market. Great companies adapt, adjust, and come out stronger than before. The clean up also creates ample space for new players and new competitors. This is why markets usually come back stronger and better after every crisis.

So let’s stay positive, observe, and get ready to continue investing. Preferably, when some stability comes back to the daily news, and when expectations from all market participants start to become a little less speculative, and more solid instead.