Investing lessons from the COVID pandemic

 2020 has been an eventful year for investors – one that they are unlikely to forget anytime soon in their lifetime. In many ways it has been similar to 2008, the only difference being that both the downside and upside in 2020 has been much more rapid than in 2008. Surely 2020 is one for the ages – tales about the pandemic and how investors first lost money and then made more money will be narrated to progeny on many a dinner table. So what investing lessons can we take from this pandemic? Here are some that I have put together in no particular order.

• Take volatility in your stride

Stock markets are volatile in the short term. That is because all kinds of people – from traders to Institutional Investors with different time horizons – are plugged into the markets every day, each one trying to work it for their own benefit. Consequently ups and downs are a natural attribute of the stock market. Hence do not be perturbed by volatility. Learn to ignore it or if possible even take advantage of it – to invest even more on every significant correction. 

• Invest for the long term

Remember that behind every stock that is trading in the market, there is a real business that is serving real Customers and generating real revenues. As long as the overall economy is growing (which it will, because this is a common objective of all Governments worldwide), many of these businesses will prosper and grow faster than the economy and will be rewarded by the stock markets. This takes time – months and even years. Always invest for the long term and have the patience to let the markets reward your conviction.

• Stay Diversified

In the past 20 years, not a single investment asset class — Large Cap Stocks, Small Cap Stocks, Real Estate, International Markets, Gold to name a few — had the best returns in back-to-back years. Each year the best investment category flip-flopped. Staying diversified, as per your recommended asset allocation, gives your portfolio the best chance to benefit from all asset classes in the long term

• Focus on Asset Allocation

Long term wealth is created not so much from superlative returns in the stock markets as much as from a judicious mix of asset categories in your portfolio. Assets such as Debt, Real Estate, Gold, etc. have their days in the sun and are also capable of generating superlative returns. Hence always focus on the asset category mix of your portfolio in order to generate wealth for the long term.

• Rebalance your portfolio regularly

Business performance changes over time with changing market conditions. For instance, in 2020 Technology stocks have done very well due to the high demand for Work from Home whereas Airline stocks have languished due to the diminished travel demand. If you could have foreseen this change in March/April 2020 and rebalanced your portfolio accordingly, it would have performed very handsomely at the end of the year. At this time technology stocks have run up too much and further upside may be limited. This may create demand for value stocks once again. Hence rebalancing your portfolio for this change may help you in 2021.  

So there you have it – a mini capsule of investing lessons from 2020. These lessons are not revelations – they have been repeated ad nauseam by various investment experts using different words and sentences. Yet many of them remain in theory and rarely get implemented in their true spirit. This is where an Investment Adviser can help. If you are not able to implement these lessons on your own, then consider hiring an expert to advise you on your portfolio and be by your side to help you navigate the markets ups and downs. 

How to find businesses with wide moats

I was a chartist. I loved all that stuff. I had charts coming out my ears. Then, all of a sudden a fellow explains to me that you don't need all that, just buy something for less than it's worth.

Warren Buffet

In the investing world, “moat” is a term that has been popularized by the legendary investor Warren Buffet to mean the amount of competitive advantage that a business enjoys in the marketplace over the competition. Moats create entry barriers for the competition and enable the business to harvest uninterrupted profit from its products and services. Therefore moats are a very desirable attribute for investors, when screening for investment opportunities. If they exist at all, moats can be either wide moats or narrow moats. Obviously wide moats are preferred over narrow moats, not only because of the extent of competitive advantage that they provide to the business but also because such an advantage may even be sustainable in the long run. Businesses with wide moats are therefore the ones that long term investors want to ‘Buy and forget’. In the Indian context, such investments fall in the category known as ‘Buy right, sit tight”.

Wide moats in a business may exist for a number of reasons. Some of these include strong brand, widespread distribution network, loyal customer base, low cost of operations, etc. Whatever be the reason for the wide moat, the search for the source for it always ends in an intangible asset – i.e. an asset that is not present or reported on the balance sheet of the business. Isn’t this strange – the one asset that gives the business a wide moat and hence a lasting competitive advantage does not even make it to the company balance sheet and hence never ever reported to investors. This is the single biggest reason why screening for businesses with wide moats is a task fraught with danger, because the person doing the screening may have to rely on hearsay and assumptions rather than hard facts. Unless of course there was a way to measure the intangible assets of the business and value it in monetary terms, in the first place!

This is where the icTracker comes in. We developed this software explicitly to address this very problem i.e. to measure the intangible assets of the business from the company’s reported financials and value it in monetary terms. Next we developed a ratio called the Knowledge Basis – which is just the ratio of the Intangible Assets over the Total assets of the business. Note that Total assets equal the Intangible Assets as calculated plus the physical and financial assets which are reported on the Balance sheet of the Business. The Knowledge Basis then becomes a simple measure for checking if the business has a wide moat. As a thumb rule we consider that a Knowledge Basis greater than 50% means that the business has a wide moat, else it has a narrow moat. The icTracker software has therefore quantified the calculation of wide moat and made it objective, thus making screening of stocks easier and more importantly, reliable. Our icAdvisor service in fact uses the icTracker database when designing and rebalancing client portfolios.

What to Do

When making investment decisions for your stock portfolio, always ensure that the underlying business has a wide moat. But that is the easy part – the difficult part is staying on top. Moats can disappear very quickly if a new competitor takes over the market for instance using a superior moat. Hence it is very important to check the moat of the business every quarter to ensure that the competitive advantage it enjoyed earlier is still in place. It is well and good if you have the time and passion for doing this yourself. If not, you should approach a SEBI Registered Investment Adviser to help you with this process.