Worried about your investments? Well, then you have got a few things to learn.unlearn.relearn! This post has been co-authored by Amit Wilson and Shantanu Kumar who are not worried about their financial decisions. Read on to know why not.
Two weeks back, we took some ‘dramatic’ investment decisions with our respective portfolios. We call them dramatic because they went against everything we have practiced or preached until now. Moreover, they also go against what is being recommended on mainline media.
On second thoughts, perhaps ‘foolish’ is a better word. But we’d rather be foolish than bankrupt.
“It is extremely important to point out, right at the top that we are not certified, financial advisors. Although both of us have worked in the financial industry in the past. This is not advice. It is merely a synopsis of our thinking and our personal investment decisions. Read it purely for academic or entertainment purposes. Please consult your financial advisor before making any investment decisions.“
To appreciate our dramatic or foolish decisions, one must spend a moment to understand our thinking.
Let’s start with a question. What is the biggest difference between any economic crisis in recent history and the COVID-19 crisis?
It’s one word. ‘Fear’.
Never in recent history have 8 billion people been in a simultaneous state of fear. Existential fear, social fear, economic fear, fear for their health, their loved ones, their jobs, their finances, their future; and for millions, their mere survival. This is not debatable.
What is debatable though is how long this pervasive fear will last and how it will impact habits, behavior, decision making, consumption and economies in the short and medium term.
It’s debatable because there are no precedents. We are in unchartered territory. While both the optimists and the pessimists, deliver strong cases; they seem to lack conviction in their own arguments.
And this, is what makes us uncomfortable.
Worried about your investments? during the #COVID19 crisis? – “We are not worried and here’s why”:
1. We have all but exited equity mutual funds
Some financial advisors have told their clients that this is a good time to invest; the logic being that the market is below its peak. Everything is 20% off. Normally we would agree and move our money from debt to equity. We did the opposite.
When the markets rebounded from their March lows, we used the opportunity to sell our equity holdings and reduced their weightage in our respective portfolios to just about 20%. We have sold all small- and mid-cap equity. We are holding on to some large-cap equity. But we are monitoring our investments continuously. If markets rise further, we may very well exit equity completely.
Here’s the thing. Let’s say you have Rs. 100 and you’re invited to play a game which goes like this. Heads you win Rs. 10 and Tails you lose Rs. 50. Would you play this game? Would you play it if this hundred rupees was your life’s savings?
This is pretty much the case today in the equity markets. If the optimists turn out to be true, the markets will recover, and grind their way back to where they were. It will be a slow and gradual rise as they’ve already risen quite a lot from the lows. Here, we win small.
If the pessimists turn out to be true, and the economic shock is prolonged; the markets could suffer a dramatic fall. Here we lose big!
We’re talking about our life’s savings. We don’t want to lose big. We’ll wait till we have a better sense of what’s happening around us. Until then we will just knock the ball around and play out for a draw.
Here’s something for you to think about. Try and answer these:
(i) When will flights be full again? Some folks will start flying from day 1, some will take longer. The point is, when will the most scared people resume flying? Because that’s when airlines get back 100% of their customers.
(ii) What about a movie theatre or hotel? When will the most scared person you know, enter a movie theatre?
(iii) What about a restaurant or a crowded shopping mall?
(iv) Will people react to COVID-19 by indulging in ‘revenge shopping’?
Your answers should govern your investing approach in equity.
2. We have all but exited debt mutual funds
We invest in Debt for safety and stability. But recent developments have made us extremely vary of corporate debt.
We must not forget that we are living in unprecedented times. Sales of many companies are at zero. And that will inevitably have an impact on their ability to repay their debt. While the moratorium offered by the government is a welcome step; it’s fair to assume that it won’t be business as usual for many companies.
We didn’t want to waste time in trying to identify these stressed companies; and whether our debt funds have an exposure to them. Truth be told, it’s perhaps a little early for anyone to know this for sure.
But here’s the thing. Is it fair to assume that out of the hundred companies that our debt funds have an exposure to, five are stretched financially? Is it fair to assume that maybe 1-2 out of these 5, may not be able to fulfil their debt obligations. That to our mind was a risk not worth taking. Forget returns, our capital wouldn’t be safe! Remember, we are playing for a draw.
Here’s something for you to think about:
In the past few weeks, several debt fund managers have come out and allayed fears that their funds invest in only the top rated companies. Companies which have strong balance sheets and are financially sound. And hence investors have nothing to worry.
We are worried. Many pre-COVID ratings are likely to be irrelevant in a post-COVID era. An erstwhile strong company’s business model may be under threat due to the prevailing circumstances. And hence a great pre-COVID rating brings little comfort to us.
What do you think?
3. We are in FDs and Cash
We hate admitting that we’re in FDs. We have disliked FDs for decades but in this chaos, we love what they have to offer – safety.
We have only two priorities at this time:
#1: Safety of money. We are willing to give up on return and even accept zero return to keep the money safe.
#2. Liquidity. Investments and savings should be easily accessible. If things get worse and income dries up, we will need access to this money. Moreover, if the stock markets do indeed tank, we have cash on our hands to deploy.
If the optimists end up being right, we’ll win, but we’ll win small. Our FDs will give us a modest return. And so will our 20% exposure to Equity.
If the pessimists end up being right, with 80% of our assets in FDs and cash, we will be nicely positioned to enter the equity markets again and hope to win big in time.
Hang on! We are not playing for a draw at all! We are playing for a win either way. And that’s why we are not worried.
If you find this interesting and want to have a chat, or even bounce off what you are planning to do with regards to your investments, do fill in this form.
The post has been co-authored by Amit Wilson and Shantanu Kumar, Founders AutoFi. It is a revolutionary payments manager. It manages your payments, so you don’t have to.