Market Crash – First Round

I somehow managed not to write an article for a whole month. No excuses, but I was busy. I got occupied with my wife’s smoothie business, I had to make a 1-week business trip to Krabi and Koh Samui, and my head office in Bangkok had plenty of requests for me to work on. My daughter required a little more attention, my dog had his final moments and sadly passed away after almost 18 years of companionship. March was a little overwhelming.

Most of the little free-time that I had left I spent at the gym. Turning 41 must have triggered a tiny midlife crisis in me, because recently I not only started visiting the gym more regularly. I even started applying face cream. Yes, I know. I might be late to the party but previously, I never actually considered doing that. Instead, I enjoyed getting to look older for the last 5 years or so. I don’t know, but all these small wrinkles, I always felt like they would add more character to the picture. This changed last month.

Anyway. That was some thoughtful introduction. Now back to finance.

With all my portfolios back in the greens, I call the market crash over. Done. Finished. History has once again proven reliable, and the stock market showed a pattern that experienced investors appreciate for many decades now. There is always a crash. And there is always a recovery. Once again those who trusted in the market and kept steady or even invested during the crash are now coming out stronger, and wealthier than before.

Don’t blame yourself if you missed out on the action. It might have been just the first round for you, but it surely won’t be the last. We don’t know when the next crash will come and it’s impossible to time the market. But history is teaching us over and over again, that there is no bad time to start investing. In the long-run markets tend to go up more frequently, and stronger if compared with the downturns. So when stocks do go down, it’s usually a good time to be looking out for great companies at fair or even at cheap prices. In the meantime, you can keep investing anyway.

The market was rising strongly for a few weeks now, and it’s very likely that it will continue to rise. Unless of course we get another pandemic, a war, or any other kind tragedy that would put the world in turmoil.

I am rather optimistic, by nature, mostly because the US has a reasonable person back at the top. President Biden is more predictable, communicates smarter, and pays attention to the world as a whole, in stark contrast to his predecessor. At the same time he is tackling massive investments in his countries future, which should push the entire world into a competitive streak of investments that will benefit a wide range of corporations globally. Investments create cashflows, revenues, salaries. These in return curb consumption, spending. That’s how the world works, and that’s why investors keep winning.

So if you are already invested: Enjoy the change of winds and watch your portfolio recovering or growing. If you are not invested yet, now is as good as ever. You might have missed the speedy recovery, but the opportunities are endless.

What a year

Today is the 14th of November 2020, and what a year this has been! With only 6 weeks to go and all the bad news going on, all I want at this point is for it to end.

Whatever your idea or opinion about the Coronavirus might be, we have to acknowledge plain facts that it had an immense impact on literally the world as a whole. This is beyond anything my generation experienced so far.

Jobs were and are being destroyed, incomes diminished, entire industries shut down, and thousands of people are still dying across the globe. And just to be clear: Whether it’s a direct or indirect count, if the virus triggers the death, then it’s on Covid to me.

Since I am working in the hotel industry, I am directly affected by it. In order for my business to survive, I need to cut expenses, reduce jobs, reduce salaries. It hurts. It’s many tears and many broken hearts. Many tough decisions every single day. And despite having the promise of a vaccine now visible on the horizon, we still have a few more months of pain and suffering ahead.

Also let me share with you this: As a business insider in an executive role, I can tell you here and now that this won’t get better any soon. Even post-covid. For most, the jobs that were cut aren’t coming back. The recovery of the service industry, the largest industry in the world, will take years. In order to survive cost cuts will remain in place until further notice.

Financial independence has never been more important

What I am sharing and trying to explain above is that the world is not going to get really significantly better any soon. And even if, how do we know that there won’t be another outbreak in one, two, or five years from now?

We have learned that there is no such thing as invulnerability. There is no such thing as total job security. And when times get really tough, even the best employers might be forced to make some tough choices to the detriment of employees.

Business owners face even greater risks, especially when they operate on thin margins and have not sufficient funds to survive prolongued periods of time without a regular income.

So what are our choices? How can we financially prepare for such an event?

There aren’t many choices, frankly, and there is no single solution. What we have to do is to create layers of protection. To create multiple income streams. And being invested in the stock market is one such strong layer. Also during the current crisis, it has again shown to be a reliable protection for tough times.

I am not talking about the value of my shares. I am down 25% in my portfolio so far. What I am talking about are dividends, my passive income stream.

Let me compare it with my salary, which is currently being cut by 25%. Next month it will be probably around 30%. At its peak, the cut was at 40%. But my dividends have decreased by only 11% year on year. And while I am not certain about my salary, I am quite confident for my dividends to fully recover next year.

Some of the most reliable dividend companies have not changed their policies and kept paying the same or even increased amounts throughout the crisis. This has again reconfirmed with me that for those who seek financial independence, being invested in the market is essential.

This crisis has been a huge reminder that we need to take responsibility for our financial well-being into our own hands. We can’t always rely on others, not to mention governments.

And it’s not just about the money. It’s about having that pressure off your chest, knowing that you have one more layer of safety, one that will contribute to protecting you and your loved ones when times are tough. This feeling alone is beyond any monetary value.

What the pandemic is teaching us

As I am writing these lines, we are into the 8th month of the pandemic. And as this year has only 9 more weeks left before coming to a painful end, it doesn’t look like the pandemic would stop there. We are in for a long and rough ride ahead with several more months to get through.

But every challenge bears also opportunities, and during these 8 months, there were already plenty of lessons for us to remember for the future ahead. Especially when it comes to our jobs and finances.

Lesson 1: There is no such thing as job security

The first lesson was to recognize that there is no such thing as “job security” when a real crisis hits. Given how our economies are connected and intertwined worldwide, any crisis that comes on a global scale is likely to effect employees and business owners everywhere and in almost every industry.

This pandemic showed us how quickly companies find ways to reduce staff counts and reduce payrolls. Whether people get furloughed, put on unpaid leaves, or forced to accept pay-cuts. When a crisis hits, people suffer. So one would do better preparing for such an eventuality.

Lesson 2: Emergency funds make sense

I wrote about emergency funds before, but let me repeat it again: Everyone should have an emergency fund that covers 3-6 months worth of expenses. More cautious types might even consider saving for up to 12 months.

Having an emergency fund won’t negate your worries when a crisis hits, but it will certainly ease them. Knowing that you don’t need to panic when the next rent or utility payment is due is already a huge relief. Not having the immediate pressure or struggle to afford your regular daily, weekly, and monthly expenses will keep your head clear and allow you to focus on finding the right solution to the challenge at hand, without the pressure or need to compromise on less adequate opportunities.

Lesson 3: One source of income is not enough

It’s good to have an emergency fund, but to increase your defenses even further, you should also not rely on a single source of income. Creating multiple income streams is a critical step not only for those who plan to retire with a better standing but also for those who want to prepare for emergencies.

Lesson 4: Be prepared to help others

If you have an emergency fund, additional sources of income, and are even able to keep your job while a crisis is spreading across the globe, then you have generated a unique opportunity for yourself: You can protect yourself and those in your care, and you might also be able to support others.

A friend in need, a local shelter for the homeless, or an orphanage. There is always someone in need. Whether it’s money, food, or clothes. Giving feels good, and even more so in such a difficult time.

Breaking Rules

Nothing is as it should be this year. 2020 will go down in history as one of the worst years for my generations (X / Y – I am right on the brink).

Highest unemployment as far as I can remember across the globe. People are restricted to travel between countries, in some areas even between cities. Foodbanks, charities, and NGOs are stepping up and doing what they can to get people through hard times, even in the richest and most developed nations. Medical supplies are running short, equipment gets scarce. And governments are printing cash for people like there is no tomorrow.

Every weakness of our economic systems has been exposed by now. The mantra of a small government and an unhinged economy has been crushed to pieces. Whether it’s Germany, the US, UK or Thailand: Without government support it would all collapse.

It’s a terrible situation, but we will get through this, as humanity always did. There is light at the end of the tunnel, and I am confident that we will thrive again once this is all over.

And having said that, as bad as it is, it’s also a great lesson and experience for us. Instead of lamenting and complaining, we have right now the opportunity to analyze the situation and to think about how we can handle a similar occurrence in the future. Because we know that this wasn’t the first, and certainly won’t be the last pandemic that we will have to deal with.

Financial independence should grab more spotlight than ever before

The current situation showed lots of weakness in the structure of our society, especially to those who are in the rat race. As the crisis triggered massive unemployment, salary cuts, and put people in danger of losing access to their basic needs like shelter, food, and healthcare, it has never been more obvious that the rules we follow are flawed.

People are talking about jobs, minimum wages, worker protections. Protections from evictions, free medical support, and other measures to help all of us getting through the challenges of the pandemic. And it’s all good and right. We need to work, we need to have our rights protected, and we need a framework of rules to make sure those in power don’t abuse those who are not in a position to protect themselves.

Unfortunately, the same rules that protect us are also the rules that limit our opportunities. They push us into the rat race, into the dependence on people who employ us, and on governments that care for us. We give away some parts of our freedom and receive in return limited protection that helps us to make it through the days ahead.

But those who really want to get at least a slice of their freedom back, they got to break out of the rules and take ownership of their future. It’s especially situations like the current crisi, when financial independence becomes more important than ever.

Being financially independent means that you can afford to have a shelter without relying on the government, that you can put food on the table without relying on charities, and that your health is protected. Financial independence is not about getting rich. It’s about freedom.

The steps for reaching financial independence are only a few:

  • Earning as much as you can
  • Spending as little as possible
  • Saving and investing the surplus
  • Building passive income

Only four steps that explain it all. Simple and while not easy, definitely achievable with the right mind-set, plan and determination. And the benefits are immense. Not only may it allow you to retire early from your regular job. Achieving financial freedom will also empower you to pursue other paths and passions which you might have not considered previously due to financial commitments that couldn’t be neglected.

Even more importantly though, it will also prepare you for hardships, and situations as we are experiencing right now. It’s undeniable that those who build up emergency funds that cover 6-12 months of expenses, or who have passive income streams, are significantly less worried while the virus is causing panic and havoc across the world.

The FIRE movement is just a smart thing to do

When you explain the idea of financial independence and the FIRE movement to people who never thought about it, you will hardly find anyone who would disagree with it these days. There is nothing about massive unemployment, stagnant wages, and deteriorating economic conditions that would encourage people to go back to the old days.

And this is not a one-off event. It will happen again. Maybe it will be another virus. Maybe something else. But we know that hard ships are part of the equation throughout our lives. So wouldn’t it be a smart thing to do something about it? To prepare for it?

As my readers know, I am promoting investing in stocks. And surely, many companies got in trouble and had to cut or reduce their dividends, hence also impacting my passive income. But what this crisis showed me clearly is that while there is no 100% protection in this kind of environment, the odds are still clearly favouring investors over regular workers.

I work in the hardest hit industry of the pandemic: I am a hotel manager. And while my salary was cut by up to 40% as my hotel had to close for a few months, my passive dividend-income went down only by 9% on average year to date so far, and I expect it to remain on that level.

If you ever had doubts whether FIRE is for you, these doubts should be gone by now. And whether you invest in stocks or real estate, or any other way that generates passive income streams, it should be (or become) a part of your plan.

The pain continues… for some

We are now in the middle of the third quarter of 2020. August. And the world doesn’t look much better than it looked in the second quarter. In fact, despite all the happy talk that you might hear occasionally on some news, data points increasingly towards a bad fourth and final quarter as well.

So the pain will continue and might even increase. More companies will close their doors. More people might lose their jobs, or endure salary cuts. Many people will remain dependent on the support from governments, friends, families, or charitable institutions… and sometimes strangers.

The suffering is not equal

But some suffer more than others, and guess who is suffering the least? Well, from what I see, income investors have suffered very little in comparison to regular folks.

When I look at my income portfolio, it looks as bad as it gets with current total performance in value development of -29%. Almost a third of the money I invested has disappeared. On paper. In reality, it doesn’t disappear until I sell the shares – which I have no intention to do within the next 20 years or so.

But interestingly, my dividends for this year will be holding up much more stable. According to my most recent forecast, my dividend income for this year will fall only about -8%.

Cash is king

In a crisis like this, income investors have the advantage that most of their investments are/were around financially strong companies, which generate either strong cash flows or which are simply rich.

In addition to this, many dividend-paying companies tend to offer essential services. Whether it’s water, energy, food, or our most addictive tech-entertainment. Those companies keep earning money no matter what and can largely sustain their dividends even in a global crisis.

Having strong cash flows and/or a well-prepared emergency fund, those companies can navigate through the storm, and even use their strong cash position to grow and expand their business. One should not get surprised if the strongest among them come out even stronger after the crisis.

Technology is unstoppable

I have this year so far only added money to my speculative portfolio which has several technology titles in it that either benefit from the pandemic, or which are simply not relevant to the pandemic at all. And while my income portfolio shows a -29% performance, my speculative tech portfolio is already back up with double-digits and +25% in market value.

Some people are wondering why the technology sector keeps rising despite the harsh reality that we experience across the globe right now. But in fact, it’s not surprising. Technology will be moving forward no matter what, and being invested in a few solid technology-focused companies will probably serve as a great diversification to any portfolio for the foreseeable future to come.

Keep investing

So yes, I keep investing. I am currently not adding money to my dividend income portfolio, but plan to do so around October. August and September look still awfully bleak and we might see more bankruptcies, more unemployment, and more suffering. But the longer it will be going on, the closer we will get to a solution. I am, however, putting money into my speculative portfolio.

History has taught us, that after every crisis the market recovers. As a young investor, you should therefore not hesitate. Whether you go in with an ETF or individual stocks. Crisis or not, keep investing regularly, and diligently, and as we get closer to a solution to this awful pandemic, your efforts and trust in the market will very likely plan out according to similar events of the past and reward you in the long run.

There are of course no guarantees, but what is guaranteed these days anyway?

Keeping investing in difficult times

There is a lot of “happy talk” from governments around the world promising a swift recovery and promoting a way back to a “new normal” on the immediate horizon. However, when listening to politicians we always need to keep in mind what their incentives are. Politicians have a vast interest in painting positive pictures because their positions and their re-elections might depend on it.

In times of crisis, it is better to listen to other voices, and in particular to businesses. Not to their press releases, which are also often overly positive to keep investors patient and calm. The more relevant information is flowing in the background: Are they hiring people or did they freeze their payrolls? Are research and development projects being continued? Did they request their financial partners to extend credit lines? Are assets being sold off or do they continue to add value with acquisitions? Are they scrambling to get through the crisis, or do they take the opportunity to eradicate weak-points in their business models?

You don’t need to DO the research

For large companies, you can trust that somebody is doing this research for you. Financial magazines, newspapers, analysts, online blogs. There is a lot of work being done by many people out there. All you need to do is to find this research, to read it, to evaluate it, and after reading a few of these sources, to form an opinion based on the information you received.

You can do this for individual companies, but as an investor, you definitely should do this for entire markets. The world’s most famous and successful investors read a lot, and the majority of what they read are assessments, opinions, and evaluations of products, services, trends, and opportunities.

People like Warren Buffett, Bill Gates. You don’t need to like them or to necessarily agree to their ideas and positions. But you should acknowledge that they have a significant amount of knowledge about what is happening in the world. They use this knowledge for their decision-making process, where to invest, which project to support. Which idea or business model, or charity offers the best chance of success, adding value to the market, to investors, and to potential customers or recipients of the product or service.

The picture is pretty bleak

Looking at what is happening in the markets right now, the picture is pretty clear. And pretty bleak. We are in a recession, one that might last a few years.

Almost every colleague of mine is on a salary cut, furloughed, or anxious that he might get into a challenging situation in the next few months to come. Companies in the travel sector are obviously heavily impacted, but also other sectors experience similar challenges. Job cuts, sales of assets, and project delays are mentioned daily basis in newspapers around the world. And while some economies started to slowly re-opening, cash-flows are still very far away from where they were in 2019. The numbers for the first half of 2020 will come in and will be reported in the next weeks to come, and it’s pretty safe to say that there will be some shocks ahead to those who kept listening to the happy talks of politicians.

All this doesn’t mean that you should stop investing

As I mentioned in a previous article, this could nevertheless be a great opportunity for investors. Every crisis has survivors and losers. And survivors usually come out stronger every time when they are challenged and pushed to improve, to re-invent, and to innovate. From my point of view, this crisis has pushed us into new investment territories by emphasizing the importance of sectors that were neglected in the past.

Technology is already a clear winner (again), but it’s worth taking a deeper look into it. Some areas of technology will shift into a stronger focus than others. Cybersecurity for example is such a sector. Work and freelance platforms are another.

Producers of hygiene products and business which focus on health & safety can expect long-term benefits for the years to come. But the same goes for companies which not many had on their radar like waste management systems, and water supply and filtration technologies. You know where all your germs go to every time you shower or visit the toilet, right?

Plenty of opportunities in every crisis

When you read enough, gather a sufficient amount of information and knowledge, and adapt your thinking to understand that there are opportunities in every challenge, then you will quickly realize that, crisis or not, there is no reason to ever stop investing.

The only limitation I would see is when you are running out of time. When you get old. But by that time, your portfolio should be the last worry you have. By that time, I would hope that you have had a successful investment history and that you can happily retire on your monthly dividend income.

The next downturn is coming

The last few weeks have been pretty interesting. First the stock market crashed. Then it started to rise and became “the most hated rally” in history. And now it’s back to crash again.

What I did over the recent weeks was observing which shares were rising and falling faster than others, and I did make some purchases. For most parts I bought shares of companies in the tourism and real estate sector, which fell dramatically, but which also show the most promise of rising back up swiftly once the real recovery starts.

The real recovery might take time

But indeed, the real recovery might take much longer than people, and the market, are anticipating right now. Since I work in the hospitality sector, I know very well the projections, and the expectations we are facing in the real world. And the stock market will adjust to these realities at some point.

The swings up and down right now are really extreme and show that many trades are being executed on impulse, on emotions. But in a few weeks these sporadic reactions will reduce, and real data will take over. The crazy daily swings will become moderate, and we will get back into a more stable trend.

The big question is of course whether it will be a positive, or a negative trend. And it’s really hard to determine, but personally I still expect an overall market downturn, because the recovery will take time.

The service industry is crucial – and so are spending habits

The service industry includes hospitality of all kinds. Hotels, bars, restaurants. And these businesses form not only the largest employment sector on the planet. They are also based on the idea of bringing people together. Sitting together. Spending time together.

Given that the behaviour of people has been altered due to the current pandemic, and also that it won’t likely change significantly unless there is a vaccine or cure, it’s therefore probably realistic to assume that a real recovery can only begin when this problem is solved.

Now a workable vaccine may come sometime by the end of this year, more likely during the 1st or 2nd quarter of 2021. Also, there is a high chance that the first generation of the vaccine won’t be as successful as some investors might think. The reason is simple: The first generation of vaccines is usually not the best one.

Given all these details, I would rather see any meaningful recovery to begin around the 3rd quarter of 2021. And until then, people will keep losing jobs, spendings will be marginal, travel will be restricted, and cash-flows will remain on the lower levels. Less spendings means lower revenues, lower profits, lower investments, fewer jobs, … you get the picture.

Good time to start investing

But again, as mentioned in this previous article, it might be a great opportunity for many people to start investing. While the short- and medium-term might look insecure, the long-term prospects are still in favour of investors.

Buying great companies at a fair price

Yesterday I watched an interview with Warren Buffett. It was actually from February this year, but I hadn’t that much time to focus on such a long single video then. The interview went on for over 2 hours. Now, with working from home and my hotel closed, this was an opportunity to seize.

Warren Buffett is a fascinating individual. Humble, simple, outspoken but more than often speaking in riddles. I watched several of his interviews and speeches in the past and what strikes me every single time is that he constantly keeps repeating the same 2 core messages.

His first recommendation for the average investor is to simply purchase an index fund. Not spending too much time with picking individual stocks. Not pretending to be smarter than the market by spending hours and hours analyzing shares with some sophisticated metrics. Especially when this time can be better spent doing something else.

For those who prefer to purchase individual shares, however, he does have a second piece of advice. And he keeps repeating this one over and over for many years.

Buy a great company at a fair price

As people who don’t understand the stock market like to refer to it as just another form of gambling, the fact of the matter is that when we purchase shares, we are actually becoming co-owners of that particular business. We are taking a stake in that particular venture, for the good and for the bad side of it. Warren Buffett puts, therefore, the investment thesis down to a simple formula: Do you believe that the business you want to buy will exist and do better in 10, 20, or 50 years from now?

If the answer is yes, then you should invest in it. Of course, you should still do your due diligence, research some more details about the management, structure, and check on the valuation, but these are not the key factors. The first thing to clarify is whether the company has a solid business model, whether it offers solutions to problems people have and will remain to have, and if it’s smart enough to do it in a sustainable and profitable way.

Obviously, this is not the “get rich fast” approach. And as he once famously stated, his advice is being constantly disregarded or misinterpreted because “nobody wants to get rich slowly“. Nevertheless, this approach is what real investing is all about and how he became one of the richest people on the planet.

There are always great companies at a fair price – but especially so during a recession

Every crisis offers opportunities for smart investors. With markets in panic mode, stock prices of even the best companies are often being dragged down together with the rest of the market. The now expected recession and downturn will be no different. It might be therefore a good idea to put some cash aside, and to closely observe companies that you believe have a bright future ahead. It might be your opportunity, to purchase a great company at a fair price.

About multiple income streams

People all around the globe face unprecedented challenges. Well, at least it’s unprecedented for my generation (Gen X), and certainly for Millenials and anyone younger than them. Millions are losing jobs, are forced into quarantine. Many are in dire need of some kind of assistance, whether it’s cash, food, or both.

Here in Thailand, we just passed through the first month of the lockdown. When I drive through the streets of Bangkok or Pattaya where I am currently working, I see people lining up (with social distancing) for food support from the government and from some private institutions.

The Thai government is issuing cash support of THB 5.000 per month to those who need it most. It’s not much, but it’s enough to survive on a very low bar. Together with the support from private institutions, NGOs, and hundreds of those who are more fortunate and who are volunteering to support, I have no doubt that the country will get through the event.

I am also always astonished by the amount of support among Thais in times of crisis. My wife is getting postal packages from friends and family with food, face masks, and snacks. We pass on the favor by sending things to others who need it more than us. I am fortunate enough to still have my job and my monthly salary intact, albeit slightly reduced.

About income and unexpected situations

But not everyone is lucky. Similar to other places around the globe, unemployment in Thailand is on the rise on a massive scale. This is dire in a country with very limited governmental social protection in place, and where most people live paycheck to paycheck.

Which brings me to the main point: Unemployment means for many people to lose their only source of income. And we can see right now more clear than ever, how many people’s lives really depend on their job. Being without work and without an opportunity to find new employment within a short time has now turned into an existential threat for millions of people.

Also, only very few of them could have even imagined such a situation two or three months ago. Yes, some might have an emergency fund and savings to ride out bad times. But would they have expected that they can lose their job, their income, and their benefits within such a short period of time? Hardly.

Building up multiple income streams

This is where the lessons of FIRE become such a powerful reminder, because having multiple, passive income streams is what FIRE is all about! The whole point of becoming financially independent means not being dependent on your job.

Building up passive income streams is best done by investments. Sure, the stock market is crashing and we are sliding into a recession. But out of the 33 companies in my income portfolio, so far only one of them has canceled the dividend, and only two announced to reduce it for this year.

Thanks to this, I am never worried about losing my job. Sure, my monthly dividends can’t compare with my salary, but that’s not the point. The important part for me is that I won’t need to rely on government support and on charities. I will be able to fulfill my main responsibility of providing shelter, medical protection, and food to me and my family on my own.

Personally, this is a very important factor to me, as this defines my perception of freedom and independence.

Who gets the money

And just to add another layer of understanding of why investing is a safer bet than your job, let me explain here one thing. While our savings and jobs are being destroyed, a crisis like this also generates unimaginable amounts of money. While stock valuations may be nosediving right now, governments all across the globe are printing cash like there is no tomorrow.

And where does this cash go to?

In the US, every US national is receiving a one time check of USD 1.200. There are 328,8 Million people in the US, so this sums up to roughly 395 Billion USD. Yes, it’s a lot of money.

But you know who gets more? Companies. Especially the big ones. They get bailed out when they get in trouble, they receive grants, and the FED is reducing interest rates so they can borrow money almost for free. This may sound very negative, but I don’t mean it that way. That’s just how it works for plenty and a variety of reasons.

The important thing is that you have a choice to make. Do you stick to your job and when you lose it, wait for your one-time check of USD 1.200? Or do you invest, and build up multiple and passive sources of income?

Having the knowledge that governments across the globe will put significantly more effort into protecting your investments and your sources of passive income (in comparison with taking care of you directly), this shouldn’t be a complicated choice to make.

Putting the Business Roundtable to THE test

Capitalism. The most successful economic system in human history. With all its flaws, no other system has generated more wealth and elevated more people from poverty to riches. But like every other system, it’s designed and managed by humans, so obviously it will be full of flaws. And there is no better place on earth to observe these flaws than the United States of America.

The richest country on earth, with huge conglomerates and companies that are homes to the richest people on the planet. But after just a month of shutting down their business, these capital behemoths are already asking their government for bailouts.

adventure backlit dawn dusk

Photo by Pixabay on Pexels.com

The importance of emergency funds

Financial advisors usually teach their clients about the importance of emergency funds. Rule of thumb is to have 3-6 months of expenses allocated in an easily accessible deposit account. Whether it’s cash or short term, high-yield savings accounts. Whatever. Point is, that if you lose your job or if there is any other reason for why your cash-flow will get suspended, you should have a quick and easy way to access that cash. So even if your life does get disrupted, you can take the time to fully focus on getting back on your feet.

It’s obvious now that such lessons would be also critical for companies, especially the larger ones. As doors are being shut and balance sheets shattered, mass-unemployment is on the rise and demands for government support is increasing. Again, we are only a month into lockdowns, which may easily extend by another month or two.

Should governments bailout companies?

Governments around the world have responded quickly with stimulus packages, low-interest loans, grants and even direct cash payouts to citizens. I honestly don’t know and can’t think of any other solution for now. But it’s ironic, and funny enough, that even a country like the US, which is currently being led by the republican party, jumps in with help so quickly.

The republicans. Everything they are doing now is against every core principle of how capitalism should look like in a country that devoted itself to that system. Why should the government bailout unsuccessful businesses? A company that fails within as little as a month of trouble certainly can’t be called “successful” or “sustainable”.

Keeping an unsuccessful company alive just to preserve some jobs makes no sense. Wouldn’t it be better to restructure the company or to let it go bankrupt so new, smarter and better competitors get the opportunity to fill the void?

The only way I could imagine this to make any sense is if the government would see opportunities in the business for itself. Then it shouldn’t give any grants either, but rather take a stake in it.

By taking a stake in a company, the government can ensure the operations can continue and support a larger restructuring to put it back on feet. It can also keep better oversight to make sure the money goes to where it’s supposed to go to. Does anyone really believe that stock buybacks and CEO bonuses won’t happen in 2020, while employees are being laid-off, or staff salaries and benefits cut?

I am not alone with this this idea. It has been also supported by Mark Cuban and other prominent voices, who by the way might come up as an independent candidate for the presidential election in November.

The real strength

I think I heard the quote from Howard Shultz:

“It’s very easy to lead when things are going great. It gets really hard when you get headwinds, disappointments, and people are telling you that you’re in the wrong way.”

As of now, the headwinds are really strong for all of us. But it’s also an interesting and exciting time, becasue as investors, right now we can observe easily which companies are on the right track, which can endure hardships, and which have sound business strategies designed to go beyond their quarterly reports and dividend distributions.

We can (and should) also observe which companies have the strength not only to navigate through this crisis but to do so by simultaneously supporting their stakeholders. Keeping employees is just one part. Business partners are another piece of the puzzle. And yes, asking for taxpayers money is also a factor.

Being financially strong means, in my humble opinion, to not need to rely on anyone coming to rescue. Not only that but also to make a point that even if one would be eligible to get benefits, grants or subsidies, this money should be rather distributed to those who really are in need of it.

Putting them to the test

Less than a year ago the Business Roundtable declared the end of shareholder primacy and a stronger focus on stakeholders. There won’t be a better time but now to see who of those who signed the paper really meant it.

The best statement on paper is only worth as much as our actions tell. In good times, and in bad times. The world will be watching.