It’s hard enough investing at the best of times. But investing during the coronavirus pandemic feels like a minefield. There’s so much uncertainty around. And with uncertainty, comes risk. To try and make investing during these uncertain times a bit easier, I’ve come up with a few principles that should improve our returns.
Investing in quality during the pandemic
These are testing times for virtually every company. Most companies will suffer to some degree. But the strongest may survive and prosper. These are companies that have strong brands, pricing power and high profit margins. They’re the household names that we stock in our fridges and the supermarkets that we shop in. They’re the things that we can’t do without, even in a pandemic.
As well as having competitive advantages, the best companies also have strong balance sheets. They have huge cash balances that they’ve saved for a rainy day. This cash can be used to support the business while it’s going through choppy waters. Companies that don’t have adequate cash will be forced to either borrow or raise equity. Either way, this could be costly for shareholders.
As well as having stacks of cash, the strongest companies also have little debt. When crises hit, highly indebted companies will find they can no longer cover their interest payments. Companies may be forced to issue more debt just to cover their payments, with the debt potentially spiralling out of control.
Avoid stricken sectors
Successful investing during the pandemic is predicated on us being able to filter out the riskiest investments. Some sectors have been hit harder by coronavirus and the subsequent lockdown. I’m talking about the travel and hospitality sectors in particular. They’ve had months of revenues wiped out, in many cases leading to giant losses. This looks set to continue at least until next spring. For the companies that operate in these sectors, things could get a whole lot worse before they get better.
While it may appear that dramatic share price falls have created buying opportunities, I would leave these for only the most adventurous investors. The pandemic may have created permanent changes in consumer behaviour. Even if it hasn’t, some companies in troubled sectors have taken on so much debt just to survive that it’s going to be eating into profits for years to come. I believe investing in these sectors is inherently more risky and more likely to lead to investment losses. That’s why I’d avoid them during the pandemic and instead look to areas that have been relatively unaffected.
Look for value
Another way to reduce the risk is to focus on undervalued shares that appear cheap. The value of the shares provides a buffer of protection against further price falls. If the underlying company is of sufficient quality, there’s only so far its share price is likely to fall before its value becomes attractive and its price recovers. Simply put, buying quality shares when they’re improves the likelihood of achieving superior returns in the long run. Sooner or later, such share prices catch up with reality and reflect a company’s true value.
This is a simple set of rules. But it’s one that could help me to successfully invest during the coronavirus pandemic. I just need to make sure I stick to them.
Thomas has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.