Investment Lessons From The Pandemic
A big part of my job as a chemical engineer is assessing and mitigating risk. We work with hazardous and flammable chemicals, and we have to make sure those chemicals stay in the pipes and equipment that were designed to contain them. If an incident does occur, we assemble teams and deconstruct what went wrong and how we can learn from that.
Thinking about risk permeates the rest of my life. I am constantly on the lookout for threats to health, but also threats to financial health. As a result, it shouldn’t be a surprise that I have given a lot of thought over the years to the implications of a global pandemic.
As the global population grows, there are more and more opportunities for viruses to evolve and spread. I’ve always felt it was only a matter of time before a biological threat such as a virus threatened the entire global population.
I recognized the threat of COVID-19 prior to the first death in the U.S. At the MoneyShow in Orlando the first week of February this year, I told the audience that the virus could wreak havoc in the financial markets this year.
On the one hand, it’s remarkable to get out and drive around and see how “normal” things look. It would be hard to tell that there’s a global pandemic raging. But a closer inspection reveals many closed businesses and traffic is noticeably lower than normal.
With 10 months of hindsight, I’ve assessed what I got right and what I got wrong. Here’s a sampling of what I’ve learned.
Lessons from a Pandemic
The biggest issue I missed was the impact on the world’s oil markets. In retrospect, it’s obvious that a pandemic would cause people to curtail travel. That, in turn, will hammer oil demand. Given the massive expansion of oil production in the U.S. due to fracking, the pandemic created a glut of oil that cratered prices.
I underestimated the adverse impact on the real estate sector. A combination of people not going to restaurants and malls, as well as shutdown orders that literally closed businesses, made it hard for tenants to pay rents. That slammed the real estate sector and posed a threat that I should have seen coming, but didn’t.
I did foresee the run on consumer staples. I told my wife in February that we needed to stock up on certain items. However, I felt this would provide a temporary boost to spending in the sector, which would then return to normal as consumers worked their way through their hoard of supplies. That may still turn out to be true, but 10 months into the pandemic the consumer staples sector continues to do quite well.
The impact on utilities was a bit of a surprise to me. Because major sporting events and concerts were shut down, and because people were working from home, the pattern of utility consumption changed. In some cases, that hurt the profitability of certain utilities.
Early on, I recognized the benefit to e-commerce. If someone can safely buy goods from their home during a pandemic, they will do so. It was obvious to me that companies like Zoom Video Communications (NSDQ: ZM) and Teladoc Health (NYSE: TDOC) would benefit, but I underestimated the extent to which Americans would turn to Amazon.com (NSDQ: AMZN) even for things like grocery deliveries. One open question is whether the e-commerce companies will significantly retreat once the pandemic is behind us.
I did foresee a huge economic contraction in the event of a major pandemic, but I underestimated the impact of the Federal Reserve injecting huge amounts of money into the economy.
Aggressive monetary stimulus has created a disconnect between the underlying health of the economy and a stock market that has mounted a strong recovery from the deep losses of March.
What Would I Change?
Ultimately, though, I look back and ask how the knowledge I have now would have impacted my investment choices prior to the pandemic. The most obvious is that I should have shifted more of my energy holdings into e-commerce. That’s not just a good pandemic move; it’s a good long-term strategy.
That’s what it all boils down to. I am a long-term buy-and-hold investor. This pandemic doesn’t totally upend my investment style. It simply forces me to reflect on whether I am properly positioned for a black swan event like a pandemic.
But it’s also important to note that a pandemic isn’t the only potential black swan out there. A pandemic hurts the energy sector, but some of those black swans would benefit the energy sector. A long-term approach requires diversification across sectors. That’s the biggest lesson in all of this.
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