Being certain in uncertain times
It will be wise for investors to list down reasons of buying or holding a security
The last six odd months have been one of the toughest times that this generation may have seen.
These testing times have seen plans shattered and life turned upside down. What we considered as necessary is no longer acceptable and things that were a point of debate are now forming what we term the new normal.
The level of uncertainty is currently very high and everything remains fluid as pundits are all over the place predicting what is going to happen over the next few months. Zillions of Qs fill the mind of investors, especially the fresh investors. Will my family and friends be okay? What if I get sick? Will I lose my job? Will my emergency fund last? What if I can’t pay my rent?
For investors who have been sitting on portfolios, this is the time to undertake a ‘spring cleaning’ process. For stocks already in the portfolio, a hard and long look is necessary to review the key reasons of holding them and to review the fundamentals in the changed economic scenario.
Consumer buying and spending behaviours have changed substantially and as such the base case scenarios for sales would substantially be impacted. There is a conscious bias of customers to shift from retail organisations towards online and tech-based solutions, resulting in brick and mortar becoming an ageing dinosaur.
Are the organisations you plan to invest, impacted by the behavioural shift of the global population, its consumers, suppliers and key stakeholders?
For investors, it would be a wise decision to list down the reasons of buying or holding a security. This should be held close to heart and mind so that any bias can be kept at bay and these reasons can then be re-looked to strengthen the conviction in the investment.
It is recommended to consider securities in these uncertain times more as “an affair rather than a marriage” and put them continuously on an evaluation treadmill for reviewing the investment case.
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Is there a simple list of questions that an investor can create as the laundry list to tick before investment? Below is an attempt to simplify the process to create the questionnaire. The four key ones are:
Why invest?
This would state the reasons as to why should the investment be allocated. This forms the key thesis for the investment idea. This would list both the fundamental reasons (sales and returns) and also personal reasons (like investment size).
When to invest?
A key question here is that can the investment wait. This forms the anti-thesis and gives the reasons as to why should we not make investment now.
Play the devil’s advocate and if the alternative scenario looks probable, then it is better to hold on and delay the investment for now. If the anti-thesis feels hollow that is when one should invest.
Investment that falls midway and seems just there should be avoided. In these uncertain times, it is better to park for short term and wait it out for better investment avenues.
How would the security perform?
It can’t be debated more to set expectations and targets for investment. This will help one to continuously evaluate the investment and decide if one should hold on or is it the time to revisit the portfolio mix and undertake replacement/ re-deployment of funds.
What can go wrong?
It is the key to identifying the worst-case scenarios as this will help us in identifying what to keep an eye out for and the potential risk within the investment domain. It will assist in keeping an eye on the investment pulse and pick out troubles early to give ample time to exit the positions.
The central idea behind the exercise is to increase the confidence level in the investment. If there are any doubts in the investment case, it is better to err on the side of caution, delay investment in this uncertain time and avoid the “less-than-ideal” investment decision.
The built-up case should be reviewed at a pre-set frequency and if the logic is still intact and the security meets the buyer’s standard, then you can continue to hold the investment.
The writer is the head of TMU & treasury sales and a visiting faculty at IBA
Published in The Express Tribune, August 24th, 2020.
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A well thought analysis to the topic that need to be discussed appropriately and the writer clearly explain. The world crises are now multiple and Covid to Geo Political changes and change of economic blocks by countries on the globe effecting directly or indirectly on investment and economic activities. This write-up have identified illness and at the same time give thought to remedies. Good piece to read and plan in self capicity of investing.
Very good analysis and expert advice!