Restarting an economy is no easy task.
As we continue to navigate the coronavirus on a global level, the next few years are going to be a rollercoaster of emotions and market volatility. I have a handful of Millennial friends who are incredibly resentful about now having to experience a second recession. But that’s life—c’est la vie.
If there’s a positive to be found in all of this, it’s that a recession washes out many of the weak or speculative players. There is no better way to really test people’s portfolios than for the economy to go bottom-up, and shows the long-term power of diversification—how even if you miss out on some of the “good times” when the market is charting up and to the right, you have dramatically less downside when unforeseen circumstances cause the market to come crashing down.
But diversification can happen both through investment vehicles as well as inside companies. Obviously, if you are a restaurant right now, then you’re hurting. But restaurants who were either already optimized for, or have quickly pivoted to, take-out and delivery have been doing alright. The same goes for event companies that previously specialized in in-person events, and have since pivoted to virtual events. By diversifying your product offerings, either proactively or retroactively, you are better able to survive a downturn.
For example, we’ve been doing this since day one with our water purification company, Hydros. Our bottle sales were doing tremendously well before the coronavirus, because customers were buying bottles to take with them to the gym, on hikes, etc. When gyms and hiking trails were closed, all of a sudden, our bottle sales weren’t quite what they used to be—but that’s alright because we’re not just a water bottle company. We also have pitchers. We have a subscription business with filters. We have a diversified product line across multiple customer segments. As a result, through these challenging times, we’ve actually seen our pitcher and filter sales increase because everyone is at home and no longer using, say, their water filtration system at work, or drinking bottled water at the office.
So, how can you diversify and adjust in the short term?
Some industries right now are going to be challenging no matter what. Hospitality and travel, for example, has a long road ahead to recovery.
Other industries that have been hit, such as restaurants, coffee shops, brick-and-mortar type businesses, are going to need to pivot to take-out, delivery, and even subscription offerings. I’ve seen vineyards start selling wine subscriptions. I’ve seen coffee shops selling pre-ground coffee for delivery. I’ve even seen restaurants prepare specialty take-out menus where certain dishes are only available one night per week, with the menu constantly changing. These are innovative new ways for these companies to stay relevant in a time when their previous business model is no longer viable.
For companies that haven’t positioned themselves, or simply don’t have the option to pivot in this way, the short-term is going to be very challenging. You can see the difference clear as day between two companies like Uber and Lyft. For a very long time, UberEats was seen as a distraction from Uber’s core business. And yet, during the coronavirus, UberEats is a significant advantage for Uber over their closest competitor, Lyft (which does not have a delivery component).
This is what has always scared me about businesses pegged to one thing and one thing only.
If that one market, for whatever reason, becomes affected, you’re in trouble. Deep trouble.
The same goes for startup investors in the short-term.
Investors always get excited about putting more and more money into the latest, hottest company.
Even a couple of months ago, our family office was given the opportunity to invest in a new Silicon Valley startup. It looked great, had attracted a lot of very prominent investors, and even though we were given the opportunity to invest as much as we wanted, we chose to take a modest position in the company. And sure, if the business goes to the moon, hindsight would always say, “I wish I had invested more.” But what’s the downside? How over-leveraged are you willing to be for the possibility of an exponential upside?
There are a handful of books I always recommend people read when it comes to value diversification.
1. Mastering the Market Cycle
This book is written by Howard Marks, a very successful investor and the founder and chairman of Oaktree Capital Management.
One of the points he really drives home is that you can’t ever exactly call when things are going to be the top or the bottom. But you can call when things are top-ish or bottom-ish. So, for example, when in the past few years we saw companies like WeWork completely explode (great in the short-term, bad in the long-term), I saw that as “top-ish.” And when you are top-ish, that’s when it’s a good time to start being more defensively positioned.
2. Essays by Nassim Nicholas Taleb
Anything by Taleb is worth reading.
I really encourage people to read historiographies of periods of extreme transition or falls of status quo: World War I, the Great Depression, etc. These are the moments in history that give context and insight into how patterns seem to repeat themselves, and society goes from feeling full of possibility to suddenly feeling full of fear and despair.
3. Too Big To Fail by Andrew Ross Sorkin
This book got turned into a really great movie about a decade ago.
Written about all the investment banks in the 2008 mortgage crisis, this is a terrific look at how everyone thought, “This will never come to an end.” And then, it did.
The reason these works (and others like them) are so important to study is because they reinforce the idea that when you see extremes of behavior, that should be a red flag. That’s a warning sign to wake up. When there is extreme upside, you can be a little more aggressive—until you reach “top-ish.” And when there is extreme downside, you should be a little more defensive—until you reach “down-ish.”
As we navigate this new world, now is not the time to sell everything and run for the hills.
Now is the time to remain diversified, and play a bit more defensively until we reach a point where “down-ish” starts to show true signs of heading north again.