In investment, there is always a risk of mistaking a fad for a trend. It was only yesterday that the mere mention of “bitcoin” or “blockchain” was enough to cause a feeding frenzy. And who can forget the dot-com boom in the late 1990s, when a simple change of name could send a company’s stock soaring? However, in the current topsy-turvy world, it seems that buzzword investing is back with a vengeance. Just whisper “vaccine” or “clinical trial” in a (virtual) room full of investors, sit back and watch the ensuing stampede.
Ironically, there may not be that much money in finding a vaccine or effective treatment for COVID-19. Imagine the outcry if a company dared to hold the world hostage in this regard. Most of the countries with the wherewithal to produce such a vaccine or treatment are democracies. An elected government is likely to rate the interest of large numbers of voters higher than the profit margins of a corporate. Rather than bumper profits, regulated production with razor-thin profit margins appears to be a more likely outcome. Moreover, even assuming that there is money to be made, the investors who will benefit most are those who identified the likely winners well before investing in a potential COVID-19 miracle treatment became fashionable. In other words, if we wait to follow the crowd into the latest buzzword investment, it is probably too late for serious success.
While 2020 may be a highly unusual year, this investment principle still holds true. Ideally, rather than rushing to buy the latest buzzword investment, investors should seek to find the trends that will endure beyond the current crisis. Unfortunately, distinguishing between fads and trends has never been more difficult. Consider just two examples:
- Experiences versus things
Prior to national lockdowns and travel bans, much was made of the younger generation’s preference for experiences over things. Young people were seen as more likely to splurge on travel and events than on items for their homes. There was much debate amongst mall owners on how physical retail could be turned into more of an experience to appeal to this generation.
However, in the immediate aftermath of lockdowns being lifted, furniture sales boomed (especially in developed markets). After being restricted to their homes for long periods of time, people seem to have reassessed the value of having a comfortable sofa and a decent desk in their house. Similarly, recent data shows that homes with outdoor space (be it a balcony or a garden) are attracting a premium. Owning a lock-up-and-go has become far less attractive when “going” is largely forbidden or frustratingly regulated and uncertain.
The question is therefore whether the global pandemic has left permanent scars. It might be that owning a comfortable home has become a must-have insurance policy for a generation of consumers. Alternatively, it is equally possible that the recent data is an aberration and that the trend towards experiences will reassert itself once a measure of normality returns.
- Online retail versus physical retail
Physical retail has been fighting a losing battle against e-commerce for many years. However, a battle of inches quickly became a battle of yards during national lockdowns. Many retailers who did not invest sufficiently in online retailing, have lost the battle for survival during 2020.
Nevertheless, a key factor to online retailing is delivery. As a result of the surge in online retail volumes prior to national lockdowns, many employers forbade employees from having goods delivered to their place of work. In addition, the uncertainty of delivery times sometimes created frustration for customers. During national lockdowns, exact delivery times mattered less as customers were permanently at home.
As we start returning to workplaces, the old barriers around deliveries will return and a reluctance to visit physical stores may dissipate over time. However, click-and-collect options were designed to deal with the delivery conundrum and might support current online retail volumes under more normal conditions. There are therefore arguments on both sides. At the very least, it is difficult to predict whether we have seen a once-off shift followed by slower online sales growth or whether online retail will continue to accelerate at the expense of physical retail.
These are but two of the uncertainties about future trends. Another example is office space demand. Here the question is if the innate desire to be with other human beings means that the office will remain a feature of life. If so, will it lead to more required space to allow for social distancing or less space as more flexible working practices are implemented? Even technology-based investments are not without uncertainty. Consider, for example, the possibility that consumers might cancel video streaming subscriptions once they commute again, have more expenses and less time to watch. The list goes on.
When times are this uncertain, the risk for investors is that we seek whatever certainty we can find a little too desperately. We are more likely than usual to chase the latest buzzword investment. Our critical faculties are numbed and we start to equate popularity with the safety and certainty that we crave. This means that we should spend more time than ever before in weighing the counterargument for every investment case. Furthermore, if we are allocating funds to investment managers, we need to be aware that what currently appears to be a trend could quickly be revealed as a fad. This means that we should not restrict our investment managers with too limited a mandate.
As a recent example, consider the meteoric rise in the gold price during the second quarter of 2020. As the buzz around gold reached new heights during July 2020, it may have seemed like a good idea to invest in a gold fund. Suffice it to say that the short-term experience during August 2020 has been less satisfactory. Of course, one month is too little time to determine whether this was the end of a fad or a pause in the bigger trend. However, it serves to illustrate the importance of flexibility within investment mandates during times of uncertainty.
Investing is the most challenging it has been for years. To avoid potential pitfalls, we would do well to keep to two guiding principles. Firstly, do not value certainty too highly and suspect anyone that claims to be offering it. Secondly, accept that expectations about the future can and will change with very little notice. Allow for such changes in the mandates that you give to your investment managers.