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"Stay Safe" Can Apply to Your Financial Health, Too

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It’s become the most common sign off for communications these days “Stay safe.”

It generally means that the recipient should take care of their physical health and safety.

What about staying safe, financially?

Spoiler Alert: This is not another article about buying the dips.

Instead, it's about two of the oldest fundamental principles in the investing playbook.

Long-term thinking and diversification.

It’s virtually certain that the crisis we’re dealing with is going to have significant economic ramifications. Shutting down such a large number of businesses for months will cause layoffs and bankruptcies. You’ve already seen the effects on the equity markets with the major indices down more than 30% over the past month and many individual stocks down much more.

Some industries are in serious trouble. Energy/oil has been hit by the double-whammy of the virus and a global geopolitical price war. Airlines, hotels, and restaurants have seen revenues drop off precipitiously and will almost certainly need government intervention to survive in their current forms. That aid could include the dilution or elimination of the equity of current shareholders. (Remember the “old” GM in 2008-09?)

Even worse, large scale debt defaults could cause a contagion effect that leaves otherwise healthy financial institutions on the ropes.

When this is over, the landscape will be changed, but there will still be a landscape.

Businesses that provide goods and services with value to customers will still exist. They might have a different name or owner, but someone will continue to provide those goods and services.

In an admittedly oversimplified example, picture a restaurant that is forced out of business. It’s terrible outcome for the owner, the people who work there, and possibly a lending institution that financed the operation. But there will still be a restaurant there when this crisis ends. A physical building, equipment, furniture, fixtures, etc...

Now imagine that the general public is still hungry and possibly more eager than ever to go out for a meal. Some former employees who had previously been working for something close to subsistence wages (and therefore had little hopes of owning their own businesses) are able to purchase those assets for pennies on the dollar and open the place back up.

Viola! Like a phoenix from the ashes, there’s a thriving restaurant there once again. A bad outcome for the old owner and previous investors or lenders, but a great outcome for the new owners.

It wasn’t (at least entirely) a destruction of wealth, but rather a redistribution.

As a society, we have to make sure nobody starves or dies of a curable disease in the meantime, but right now it looks like the US Government is ready to use every tool in its considerable arsenal to ensure that.

(Also, I hope it doesn’t sound like I’m being insensitive to the plight of restaurant owners, it’s just a simple example. It could be a factory, an appliance service business or a million other businesses.)

Now instead of that restaurant, imagine Boeing (BA - Free Report) . It’s virtually a one company monopoly – with apologies to Aerbus. People are not going to stop manufacturing airplanes. The equipment, technology,  intellectual property and employee experience are not going away. Someone will be making and selling aircraft at a profit sometime soon.

“Redistribution” sounds scary, especially if you hold significant assets and are worried about losing them. Nobody is in favor of redistribution if they’re the one being redistributed away from…

Which brings me to my original thesis. The best way to “stay safe” financially – by which I mean a combination of asset protection and future profit potential – is to be diversified and keep a long-term perspective.

Diversification

If you have all of your eggs in one basket in terms of your investments, it’s possible that you could lose everything. If you have your investing capital spread around wisely among the strongest companies in the industries that have the least actual exposure to the current crisis, you won’t. You just simply won’t.

Thinking Long-Term

You’ll also have to be patient. This will not happen overnight. As much as I’d love to “call a bottom” because I’m personally very bullish, it could be months or even years before we’re operating at full strength again.

But “months or years” is a blink of an eye for a true long-term investor.

So if you believe – as I do – that humans are a tough lot and that we have a natural propensity to solve problems, hang tight.

If you’re not diversified, now is the time to take care of that. So many companies have seen their prices fall that you can sell part of a position in which you are overconcentrated and buy something great just as cheaply.

Keep a long-term perspective.

And stay safe – physically and financially.

-Dave

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