While only time will tell how disruptive COVID-19 will be, we already know how to pick companies that can survive this crisis
05-Jun-2020 •Dhirendra Kumar
For the moment, the best thing for investors to do is to forget about the bigger picture and focus on the smallest possible unit of investing. What is the big picture here? The motherhood questions: the state of the world, the progression of COVID-19, the impact on China being the default source of everything to the world, the fate of the oil economy, etc., etc., etc. There is no answer to these questions that can be derived now from any information that you or I have. If you are a punter, you can trade the daily ebb and flow of fear, uncertainty and doubt in these things but you can't invest in those things.
And so what is the smallest unit of investing? Obviously, the stock itself. As I've said many times earlier, it's tempting for us investors to get obsessed with big issues. From time to time, we all fall under the illusion that equity investing is about identifying and exploiting macro trends. We feel that our ability to make money from stocks can be enhanced by studying, understanding and anticipating broad trends in the economic conditions of a country or the world. Nowadays, when the world is facing the largest macro trend in decades, the temptation is all the more.
Every investing decision seems subservient to the estimations of how COVID will go. This sounds logical but it's not. The issue is the very idea that equity investors should pay attention to the large scale, macro issues and invest accordingly. The problem is that investing well and getting good returns requires a combination of skills of different kinds. Broadly, these can be broken up into figuring out which stocks will do well on the one hand and figuring out broader, marketwide or economy-wide trends on the other. After years of observing the markets and investors, I have formed a firm belief that while the former is well within the capability of many investors, the latter is practically impossible to do on a sustained basis.
I'll explain what I mean. Do we have all the inputs required to estimate how much the world economy will slow down over the next two years? And even if we did, do we have the skills or the inputs required to translate that into specific investing actions? Clearly not.
However, let's look at the situation from the bottom up. Do we have the inputs to decide which companies are stronger than others? Which have enough stored up strengths to overcome adverse conditions better than their competitors? Whose managements have a track record of operational excellence and financial prudence? Who haven't loaded up with beyond what they can continue servicing in bad times? Whose managements have actual skin in the game in the well being of the business?
The answer to all these questions is a resounding yes! All this, and more, is visible from the way companies were run before COVID. Some of these will fall upon bad times, but we have enough clues to make informed judgement calls that we can use in our investing even in these volatile times.
We need to restart this 'normal' way of investing. Ever since the pandemic broke, we have all been too guilty of focusing too much on the macros and the larger issues concerning the details of the disease itself. It's time to get down to brass tacks and start looking at individual stocks again. Of course, as is the case with all such stories that we do, this is not a list of recommended stocks. It's an exercise in evolving shortlisting criteria that may be suitable at this time. See this as part of a process of stock selection that we all have to start, sooner rather than later.