Picture this: You put USD $1,000 aside at the start of 2020 to fund a trip with your university friends for the summer to celebrate your graduation. But alas, Covid-19 rains on your parade, and you are left frustrated and with $1,000 to spare.
Despite the constant nagging from your forex-obsessed friends, you do your due diligence and invest your extra $1,000 in the “S&P/TSK” index, which tracks 250 of the best-performing companies and trades solely in American dollars. If you did this at the start of April, here’s what would have happened: by July 1, 2020, you would have USD $1213, and by January 1, 2021, you would have USD $1,361. Had you invested in Tesla, you would now have just over USD $8,700 to your name, but you went with the safer option—which is understandable for a university student looking for a long-term investment.
Now being wealthier in assets, you ask yourself: What did I do right?
For one thing, you didn’t fall prey to what Professor Lisa Kramer of the Rotman School of Management calls the “FOMO” and “YOLO” effect. This means you didn’t make the mistake of falling into your friends’ enticing and the slight “fear of missing out” they brought forth. Additionally, you didn’t make a misguided and uninformed impulsive decision just because “you only live once.” Professor Kramer says, “Someone whose portfolio choices are driven by FOMO is almost surely failing to adopt bedrock principles that advisors emphasize, such as diversification and taking a long-term view,” both of which you have done by choosing a diversified stock and holding it for three quarters despite, I’m sure, the thirst to liquidate and shop online.
The Covid-19-induced lockdown rendered most of us indoors and alone with our thoughts and ideas. Although many faced financial hardships in these times, some took the time to learn how to make their money grow. But how does one invest in a pandemic—a time marked by a cut in wages, plummeting stocks, and unemployment rates going through the roof? The answer is by observing.
Since the start of lockdown, screen time has increased. Regardless of the reason, technology companies provide direct proof of this trend as they have remained recession-proof and have, in most cases, performed above the predicted values in non-pandemic circumstances due to the usage increase. For example, Zoom has become a valuable source of connections for education systems and individuals since the lockdown began, and the graph of its stock certainly reflects this. What many have taken away from these effects is the need to research consumer demand, for example, those specific to the circumstances of a pandemic, and let them guide investing choices.
During a pandemic, it is important to manage risk exposure. This is challenging in times when the market works in more uncertain ways than usual. However, this can be used to one’s advantage by building a portfolio. In particular, by forming an investment bundle that’s largely unaffected or even positively affected by extenuating pressures, such as a lockdown.
It is certainly not wise to use social media and its numerous influencers, which are most often sponsored, as a go-to guide for investing decisions. “When social influencers brag about only the best performers among their investments, omitting details that might paint a less rosy picture of their overall financial performance, retail traders can come to expect a level of performance that’s all but impossible to attain,” explains Professor Kramer. It is essential to understand that when investing, there will be some good days and some bad. Managing the bad and amplifying the good while ensuring a net positive sum is the best strategy. For example, as university students, we understand that a great grade can compensate a bad grade, and hopefully, the bad grade has been hedged enough not to dent our GPA to great extents. The same method applies to investing.
Professor Kramer further warns against companies reporting their earnings after adding a cheeky metric that inflates their numbers. Many businesses took a hard hit from the pandemic. Many were forced to shut down, temporarily or permanently, compromising their profit. To cover their alarmingly low profits for the year, some companies reported their EBIDTAC (earnings before interest, taxes, debt and amortization, and Covid-19) instead of their usual EBIDTA. The “C” in the EBIDTAC allowed businesses to add to their earning the potential profit they would have made if the pandemic had not happened. To put this in perspective, this is similar to giving a recruiter a transcript of grades you would have gotten had you worked harder. While the circumstances that made businesses do this is certainly unfortunate, it’s best to allow the generic metrics alone to guide your decisions when you have skin in the game.
Looking ahead to 2021, we now have two vaccines, the Pfizer/BioNTech and Moderna. This finally allows us to think about the possibility of a 2021 that is “back to normal.” From a financial perspective, people will most likely have “pent up demand” in the previously unavailable industries, including indoor dining, theaters, travel, and pubs. Furthermore, the vaccine’s mass delivery presents the possibility for oil prices to go up and real estate to potentially also make a recovery as the economy bounces back. All of these financial prospects are largely reliant on the successful delivery and provision of the vaccines.
Herein lies an opportunity to grow your wealth. Why not invest in the virus’s quick demise by buying some stock of Pfizer/BioNTech or Moderna? As a guiding strategy, consider this: the Covid-19 vaccine is Moderna’s first-ever approved vaccine. So, their performance in 2021 depends on the success of the vaccine, unlike Pfizer, which comprises various avenues that decide their final success. This is also highlighted by the steep movement recorded in Moderna’s stock prices compared to Pfizer’s.
Further, listen with keen attention to your friend’s and family’s plan for the new year; this is now research for your portfolio management. The choices they make point to a trend that you may want to look out for; this is consumer demand. For all you know, this research may make you your next buck! Investing in the world’s speedy retreat back to normal in the near future may be in your best interest, but nonetheless, always consider the effects of FOMO and YOLO as you make investing decisions in 2021.