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Into the unknown

The COVID-19 crisis has only just begun and there's no point in guessing how long and deep the impact will be

Into the unknown

As markets and investment values display violent volatility on a daily and sometimes hourly basis, many investors are coming to terms with the fact - no longer deniable - that we are in for months of turmoil. At times like this, we take comfort from the fact that each of us who has spent years as investors has seen many market crises. By now we know that no matter how bleak things look, there's always a turnaround in the works. That's something that we expect and it's not an unfair expectation.

However, depending on the nature of the market crash, there's a variation on this theme each time. With the COVID-19 crisis, the variation could be something quite new and novel. The reason is that the underlying cause of the market crash is external. Equity investing is always a struggle between the underlying natural growth of economies and businesses and the multitude of uncertainties and risks that exist. Variability - the alteration between periods of sharp growth and steep falls is the normal state of equity. When we invest in equity, we sign up for volatility. In fact, we should hope for it because if equity is to give outsized returns, then it's only because there's a premium for the risks that equity investors take.

Often, we investors fall into the error of believing that risks can only come from the financial, business or economic aspects of the world. What is different about the COVID-19 crisis is that it does not originate in these domains. It's something external in that sense. Back in 2001 or in 2008, the contours of the business and financial crisis became fairly clear quite quickly. This time, a lot of things are up in the air and will stay up in the air for a long time.

At this point of time, it's simply not possible to predict what will happen and for how long the impact will stay. The full wave of the virus is yet to play out across the globe. The impact of the disease, or of the shutdowns that will stop it, will take a while to play out. The direct effects on economies will take even longer to become clear. As for the second order effects, they are not even imaginable at this point. Just one piece of news today got me thinking - Google has asked all its employees in North America, about 100,000 in all, to work from home. Only a small number of employees who have specific tasks will come to offices. All employees have been asked to take their laptops home when they leave office today. I'm pretty sure that all tech companies will follow suit pretty soon.

When will they come back? No one knows at this point. Think of all the ancillary services that one lakh people going to an office need. Will this become a trend? Maybe. In that case, think of the demand for office space and so many other things. These are second order effects. We are in the early stage of an event whose exact impact is unknown. It could be deep and long-lasting, or it could be large but fleeting.

As savers and investors, we must realise that this is genuine uncertainty. There are a lot of people who are professionally obliged to predict and (depending on what they are selling) come up with either optimistic or pessimistic projections. Depending on your own frame of mind, you might be inclined to lean one way or the other. Don't do that. Live with the fact that no one knows the size of the impact of this thing. It's better to be realistic and accept that.

At a time like this, one should remember the basics: billions of people will continue to live their daily lives, and even though it might change in many ways, economic activity will by and large continue. Moreover, bad times have a way of separating the wheat from the chaff. Better investments will do much better than bad ones. The differential for sticking to the basics and insisting on quality investments will be even greater.

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