Investing during a pandemic

There’s a law in markets that the more uncertain the situation the more fund managers feel the need to pontificate. This is especially the case when a crisis is extreme in nature and far beyond the expertise of financial analysts. Why? It’s partly because clients, savers and the media want answers, but that desire is minor compared with that of investors to prove that they are in control by taking some, perhaps any, action. This isn’t a good idea. As a trustee of Johns Hopkins University, I feel in privileged touch with public health issues. But even Hopkins does not know what will ensue in medical terms – let alone in stock market consequences. We must respect uncertainty, not preach. Stress and short time frames are not auspicious omens of intelligent action.

So our default position was inaction. Did that work? It’s easy to twist events with hindsight, but what follows is an attempt to convey what was on our minds in recent months.

March

Each March I make a trek across America from east to west. I’ve found this an excellent process to observe the profoundly different mentalities at work, to mix companies and academia and to end up thousands of mental miles from the grime, greed and arrogance of Wall Street and Washington.

On my way I did a Scottish Mortgage presentation in London. Panic was already in the air. Stocks were falling indiscriminately. The audience also assured me that Scottish Mortgage was bound to be severely affected because it had been for several months in 2008–09. All I could really respond was that panics happen but that parallels are often misguided – and that subsequent returns after the Great Financial Crisis meant that we were justified in enduring the dark days. But although we certainly accepted that there might be months of pain, there was already a parallel with 2008–09 that we thought similar or even more central. The central banks of the world would flood markets with liquidity and commit to low interest rates for as far out as they could see. The discount rate for stocks would be falling and the competition from bonds would be minimal. That matters.

By the time I reached California, the previously insouciant American attitude to the pandemic had changed. I cut short my trip but not before a last meeting at Tesla. That was fortunate as it had a deep influence on my perspective. Although it was clear that the short term would be an unanticipated struggle, it was equally evident that Tesla was far better placed to first survive and then flourish than its traditional competitors. The parallel was with Amazon in 2008–09: it mattered far less that sales temporarily slowed than that the business models of others would never recover. The electric revolution would outlast the pandemic.

April

This felt the longest month. On a human level the news was terrible, with high death tolls in Europe and growing foreboding about the American response. We were all trying to adjust personally and professionally to lockdown life. There was constant pressure to take part in large internal meetings. I found it hard to insist with adequate calm that what circumstances demanded was quiet and lonely contemplation – and then comparing notes with my colleague Tom Slater.

But there was the stirring of opportunity. The simple observation that the pandemic was not only lowering the cost of capital but also improving the prospects of many of our companies. As so often in recent years Amazon was the earliest and clearest guide dog. Although it was too early to decipher the likelihood of permanent changes, it was already, well, obvious that Amazon was worth more, not less, than before the pandemic struck. It wasn’t logical for the shares to be lower. The stock market was panicking not weighing. That’s a good time to be an investor. Perhaps Amazon would again prove to be a great guide to broader opportunities.

May

So it proved. As spring moved onwards so did the evidence that the digital world was not just surviving but flourishing. This was the public information that we were now hearing from companies which we knew well, trusted and had been keen to tell of our long-term support through the crisis. With such companies, distant conversations work well – when you already understand each other, virtual communication is fine. For building new relationships, it’s harder. Both the business patterns and the relationships would strengthen in the coming months. This was apparent globally. From Mercado Libre in Latin America to Meituan Dianping in China via Zalando and Spotify in Europe, there was evidence of exciting progress.

June

We faced our own communications challenges. June is the focus month for shareholder meetings, forums and the AGM itself. We replaced these with many Zoom sessions. These allowed for larger audiences and many questions. That’s good. But sometimes the difficulty of conveying nuance and following up issues was frustrating for us and doubtless the audience.

In the early days of the pandemic there was a general presumption that life would be very hard for unquoted companies. Yet by June the shift in mood was palpable. So many of our venture investments are digital first, often tugging at new frontiers from virtual medicine to financial system reinvention, that their businesses leapt forward in often dramatic fashion. Pandemic notwithstanding, higher not lower valuations proliferated in funding rounds. From the mighty, such as Ant Group, to the apparently troubled, such as Airbnb, the lure of the IPO returned.

July 

It’s been startling but wonderful to see the progress of so many of our companies in the crisis. But it comes with challenges. It’s still hard to discern how far pandemic-induced changes will persist. We need to resist the temptation to make wild generalisations born of temporary circumstances. We must concentrate on the core task of individual company research.

We also need to keep our mental balance. I’ve said that stress can provoke unusually bad decisions. So can over-confidence. Some of our companies have been transformed by favourable accident. We thought Zoom was an interesting company, but we did not foresee its leap to prominence. We thought CureVac a muddled and troubled unquoted biotech venture, not the apple of Mr Trump or the public market’s eye.

There’s a great deal of work to be done. But we do believe that the pandemic period is accelerating the process of change that we continually focus on in our portfolio. We see little road to recovery for supposed value stocks. If we can remain patient and disciplined the opportunities have only proliferated.