Under normal circumstances, we could look at what fund managers are buying, selling or holding and get a few ideas for ourselves. However, under the shadow of COVID, these normal rules do not hold. Normally, I would expect a fund manager to get out of companies that he or she thinks are going to do badly or are overpriced and vice versa.
Nowadays, who knows? The dominant factor is a lack of future visibility. This means that we are all sort of like the blind men trying to feel their way around an elephant. We think we are all right, but we are all wrong because being a little bit right is not of much use.
A few weeks back, I had the great privilege of being part of a Zoom talk and Q&A with Nassim Nicholas Taleb that Aditya Birla Mutual Fund had organised for a small audience. There were only about 200 participants and the event had the feel of a chat at a dinner party rather than a public event. Taleb answered questions from people with great good humour in his distinctive style, frank and blunt and yet gracious and polite.
Here's one great example of what I mean by this. Someone asked him his opinion of the stimuli that various governments are giving out. Taleb said that he had been saying this for 15 years that the way governments should operate is the way your grandmother would have asked you to - by building reserves which can be used in bad times. However, since World War II, governments stopped doing this. Why? They have economists who think they know better and so now they don't have reserves and have to borrow. At this, someone pointed out that there were lots of economists in the audience. Taleb responded, "No, no, no, these are good economists in the audience. They're not American." I wasn't expecting that response, and I'm sure neither was anyone else.
However, what Taleb says about reserves is a general truth in life, not just about countries but about businesses and individuals as well. Nowadays, countries and companies often have net negative reserves and many individuals have net negative savings, especially at a younger age. Years go by and it mostly does not matter, but then a general crisis like the global financial crisis or COVID comes along and suddenly we realise, as Warren Buffett famously put it, "Only when the tide goes out do you discover who's been swimming naked."
As the economies of the world get going after the COVID lockdowns are over, this is a good principle on which to discover which businesses will do well and which will not. There is an important distinction to be made between the economy-level, industry-level and business-level impact. For example, it goes without saying that at the economy level, the entire world will be in a recession for some time and no country will escape that. At the industry level, all travel will shrink dramatically and companies will be in a bad shape, many of them shutting down. However, does that mean that every single hotel chain, airline and restaurant chain will do as badly as any other? Definitely not.
As in any other upheaval, there will be winners and losers. In the months to come, setting the principles for identifying these will be one of the main tasks at Value Research.