Investing for change, remaining patient
By Kyle Tetting
What does it mean to invest in stocks? That is a fundamental question at the heart of being an investor. But answers to the most basic questions are often lost amid chaos. Daily updates on the pandemic and resulting economic calamity can take us away from the core of why we invest. Current events matter, but as investors, we need to look beyond the immediate condition.
At its core, investing is about earning a return on our support for the creation of new ideas. As investors, we trade our hard-earned money for some amount of ownership in a company’s ability to create something of value. The more value they create—whether by doing something revolutionary (the personal computer) or by simply doing something more efficiently (the assembly line)—the more investors are rewarded. It’s a simplistic view but foundational to investing.
Unfortunately, investors tend to be short-sighted in their prospects for the future. We look at a broad market stock index like the S&P 500 and say, “Stocks are expensive,” which by traditional measures they are right now. The result is that investors are less willing to part with cash. The added noise of the daily news only adds to their reluctance.
Of course, measures of expensive and cheap are deeply flawed. They look only at short snippets of time and are limited in the scope of what they measure.
For example, the S&P 500 covers only about 14% of the public companies in the United States and represents mostly mature or established businesses. Ultimately, such measures fail to capture the changing nature of investing, often reflecting formerly relevant businesses or industries that may be on the way out.
Consider the pandemic’s impact on the alcoholic beverage industry. Bars and restaurants have been crippled by shutdowns, yet a variety of surveys have shown alcohol consumption has increased or at least stayed the same. Further, home consumers appear to be “uptrading” or moving on to higher priced brands.
While several high-profile restaurants squeezed by the pandemic appear in the S&P 500, many of the alcohol manufacturers that have benefited from more at-home consumption aren’t included in the index because they aren’t big enough or exist outside of the U.S. As a result, measures of relative value on the S&P 500 may not tell the whole story of alcohol.
Other examples of changing industries preceded the pandemic.
For years, the trend toward online shopping has resulted in numerous retailer bankruptcies. In turn, shopping mall owners felt the sting of vacancies, dragging down investor expectations for future returns on commercial real estate and leading many to believe that real estate was overvalued.
But, while brick-and-mortar retail continues to decline, former retail space is being repurposed in ways few could have imagined. In a mall I once frequented, a 24-hour fitness center has replaced a Sears. It seems just as likely a moving van rental company and self-storage facility will take over the same mall’s old J.C. Penny or Boston Store space. In a bit of irony, the very same online retailers that put the mall anchors out of business may be looking at the vacant storefronts as distribution and warehouse space.
The very nature of change creates winners and losers. While many retailers didn’t have the resources to adapt, others stepped in to fill the void.
It should also be noted that periods of crisis tend to expedite change, much of it out of necessity. This time around is no different.
For example, employers have been forced to rethink policies on working remotely. With more workers able to accomplish their work outside the office, companies can be more efficient in how they invest in office space.
Some companies are finding ways to be more pandemic-proof. Such moves help make existing businesses more efficient, but they also create opportunities for new companies to develop solutions to problems that never existed before.
Whether the stock isn’t included in the index yet or the potential changes aren’t reflected in projections, the result is that short-term forecasts are a poor representation of opportunities in the future.
On the other hand, we know that investing in stocks, broadly, is a great way to benefit from ongoing change.
The remaining challenge is staying patient enough to benefit from change. The key is to ensure that as investors we remain humble. We know change is the norm, but we rarely know the specifics of when and what change will happen. That means keeping an appropriate allocation to less volatile alternatives to stock, both as a store of dry powder and to provide for years of income, if necessary.
The coronavirus pandemic has created uncertainty and volatility, but it has also created opportunity. By remaining patient and allowing for change, investors are well positioned to benefit from the ingenuity of businesses to adapt and drive the value of our shares higher.
Kyle Tetting is director of research and an investment advisor at Landaas & Company.
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The importance of humility in investing, a Money Talk Video with Art Rothschild
Selections important to your investments, a Money Talk Video with Kyle Tetting
Talking Money: Indexes, by Kyle Tetting
Talking Money: Benchmarks, by Chris Evers
(initially posted October 2, 2020)
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