Investment lessons learnt from the Covid-19 pandemic

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BUSINESS NEWS - Winston Churchill once said: “Let’s not waste a good crisis.”

In the past 2 months of lockdown, we have learnt many lessons, of which we would like to share a few.

Firstly, the importance of diversification and not having all your eggs in one basket.

There is nothing wrong in owning a second home or apartment being rented out for an additional income and it is an important source of income for many retirees.

The problem however is, that if this has been your main source of income for the past two months, it is likely you have not received your full rent. If your tenants continue to not earn an income for the next few months and you are not allowed to force them to evacuate, you may experience significant cash flow problems.

There are also property investors who have invested all their assets in office buildings and shopping malls. We have seen large clothing retailers deciding to stop rental payments while being prohibited to do business during the lockdown period. In the meantime, the owner of the building must meet their liabilities towards the bank and municipality while they do not earn their full income from the building.

Secondly, a mistake made by investors is not having enough offshore exposure.

Our strategy is to invest at least 40% to 50% of our clients’ assets in offshore markets depending on their risk profile and needs. This may also vary from time to time based on strategic changes made to realise some profits due to the weakening of the Rand. The rand has weakened by ±25% against the US dollar since the beginning of the year. This weakening, together with the partial recovery in global stock exchanges, has resulted in a 20% net return on offshore equities while the JSE is still ±13% lower than prior to the pandemic. Diversification is therefore, one principle that should never be ignored.

Another lesson learnt is that we should not make any important decisions when it feels like everything is collapsing around us.

Two weeks into the lockdown period, when the markets were down 30%, we received many calls from worried clients who were desperate to move their investments to cash as ‘the worst is yet to come’. Our advice was to stay in the market, as history has taught us that people’s emotional responses lead to impulsive behaviour. In the meantime, the markets have recovered to a large extent and investors have realised that they would have destroyed a lot of value if they sold off their investments at the bottom of the market.

Finally, we learnt that times of crisis always bring opportunities.

For example, investors who were prepared to buy Sasol shares at R42 have now seen positive growth of 100% within a matter of four weeks. There are many other examples of shares that have become so cheap because investors’ irrational thinking prompted them to randomly sell off their shares.

It is with good reason that Warren Buffet says: “Be fearful when others are greedy and be greedy when others are fearful.” We often think this time is different, but history has a habit of repeating itself. History has also taught us that stock exchanges may recover strongly and sometimes quickly, following a crisis. How long it will take however, remains to be seen.