Last Updated on December 2, 2024
Overview
It wouldn’t be an exaggeration to say that 2020 was by far one of the most infamous years in recent memory. The world changed forever on March 11, 2020, when the World Health Organization declared the COVID-19 pandemic and countries around the world quickly instituted lockdowns.
To most people, it may have seemed like the world came to a grinding halt, but that wasn’t the case at all. Even amid a global pandemic and nationwide lockdowns, the world still needed to move forward, doing the best it could to navigate the new times.
With 2020 firmly behind us and now bestowed with the gift of hindsight, there are an abundance of investment lessons waiting to be uncovered. Let’s go over what some of those lessons are, and what sort of insights we can glean.
The Global Financial System Is Still Extremely Delicate
In 2017, Federal Reserve Chair Janet Yellen said that she doesn’t believe another financial crisis will occur “in our lifetimes”. This comment was given in the context of the Global Financial Crisis which, among many things, served as a wake-up call for both the financial services industry and the U.S. government.
After the Crisis, a major overhaul of the U.S. financial system took place. New legislation was passed (such as the Dodd-Frank Act) and U.S. financial institutions were subject to new regulations such as new capital requirements and routine stress tests.
For the most part, these changes more or less worked. Between 2010 – 2019, U.S. financial institutions were relatively quiet, still trying to recover from the aftermath of the Crisis, and the U.S. enjoyed its longest bull market in history during this time. With these in mind, it’s not too surprising that Janet Yellen believed the worst was behind us.
However, what Ms. Yellen probably forgot to consider when she gave that comment was that the Global Financial System is more interconnected and interdependent today than it was 10 years ago when the Crisis began.
We didn’t get rid of the house of cards known as the Global Financial System. Instead, what happened was the house was rebuilt, and over time more levels were added, with each level more interconnected to the others than ever before.
All the laws and regulations that were passed didn’t try to rethink this house of cards, it simply tried to make it more resilient. However, you don’t need to be a genius to realize that a house of cards is an inherently unstable structure: all it takes is for one card to fall, and then everything else will come crashing down.
So, when COVID took the world by surprise, it was no surprise that financial markets around the world immediately went into crisis mode. Amid the carnage in March 2020, it seemed like every other day market circuit breakers would trigger to try and stop the bleeding. All it took to bring the Global Financial System to its knees was something that could only be seen under a microscope.
With this in mind, one of the investment lessons we can learn from 2020 is that the Global Financial System is still extremely delicate, and its vulnerability only grows the more complex it becomes.
This systemic risk is something no investor can hope to fully control, however, that doesn’t mean investors are completely helpless. If an investor decides to establish investments in the financial services industry, they still have the power to decide which businesses to park their money with and how much money to allocate for specific holdings.
An investor can’t possibly hope to control something as complex as the Global Financial System, but they can certainly control what investment decisions they make and whether those decisions are justified by enough facts and analysis.
No Matter What, in Times of Crisis, Most Investors Will Succumb to Their Emotions
One of the things every new and current investor is told not to do is to succumb to their emotions. If the going starts to get tough, take a deep breath, keep your cool, and try your best to continue thinking rationally.
It’s easy to tell investors not to panic – after all, most investors hear this message when things are going smoothly. However, it becomes much harder to stick to this advice during a crisis, where investors are surrounded by people whose emotions are running high.
One of the investment lessons from 2020 that has been observed in almost every other major financial crisis is that telling investors not to panic is much easier said than done.
In the previous section we discussed how, in March 2020, market circuit breakers were triggered repeatedly. That’s because most investors were in panic mode, and the one thing they tried to do was dump their holdings as quickly as possible. Even Warren Buffett took part in this mass sell-off when he sold all of his airline holdings, citing the coronavirus as the reason.
To be an investor means having the ability to keep your cool even in the most demanding circumstances – we’ve talked about emotions & investing before, as well as the importance of focusing on your locus of control.
If all it took to cause investors to panic was for a global pandemic to be declared, then this only reaffirms the importance of keeping your emotions in check.
Arguably, most of the investors who decided to panic sell did so simply because everyone else was also panic selling, even if the investments they were trying to dump were excellent and would come out of the panic bruised, but intact nonetheless.
This may sound like the solution is to be emotionless, but that’s not the case. An investor doesn’t need to discard their emotions, and by extension, their humanity, to succeed. What an investor needs to do is to discipline their emotions and keep them on a tight leash.
If you’re able to think rationally when the only thing that surrounds you is chaos, then you’re already leaps and bounds ahead of countless other investors who let their emotions get the best of them.
Investment practices and ideas may change, but the one thing that will always remain constant is the fact that there will always be investors who panic. This was the case in 2020, and this will certainly be the case in the future.
The Vast Majority of Businesses Weren’t Prepared for a World Without Human Presence
Based on what we saw transpire during the pandemic, this is by far one of the most impactful investment lessons from 2020. The argument could even be made that this goes beyond investing and directly impacts how the world fundamentally performs business.
Let’s take a look at what life was like before the pandemic struck. Whenever we didn’t want to cook our food, we’d simply find a restaurant that satisfied whatever we were craving. If we wanted to travel overseas for vacation, we’d simply buy a plane ticket, hop on the plane, and then go to our desired destination. Anytime we wanted to enjoy some live music, we’d simply buy concert tickets and enjoy the live music and the atmosphere.
Before the pandemic, one of the things most businesses took for granted was that people would always be present. Restaurants rely on people being physically present to eat, airlines assume that their flights will be at, or very near, full capacity and concert organizers assume that the concert will be packed.
For centuries, businesses assumed that human presence would never go away. If people wanted something from your business, they’d simply head over and purchase whatever product or service you were offering. For so long businesses took the element of physical presence for granted.
A risk very few, if any, businesses asked themselves was: “What would happen if, all of a sudden, people are no longer allowed to be physically present to buy our products or use our services?”
So, when the pandemic struck, countless businesses suddenly found themselves in a precarious financial situation because people were no longer allowed to simply walk in like before.
Even in 2021, many restaurants continued to struggle, the airline industry was still trying to dig itself out of its financial rut, and concert organizers required concertgoers to provide proof of vaccination or a negative COVID test.
On the flip side, businesses that don’t require human presence, or at least aren’t heavily dependent on it, found themselves flourishing during the pandemic, with companies such as Amazon and Apple posting record profits in 2020.
Amazon and Apple don’t need customers to come into stores to buy their products – their robust online shopping experiences allowed customers to purchase whatever they wanted, whenever they wanted, in the comfort of their own homes. Apple does have their Apple stores, yes, but they serve more as a way for Apple to showcase their products rather than a mandatory point-of-sale location.
2020 has taught investors that truly “bulletproof” companies don’t rely too heavily on human presence to let them conduct day-to-day business operations. If a company can complete a sale without the need to be physically present, then very few things will be able to stop that transaction from happening.
Now, this doesn’t necessarily mean that businesses that require the physical presence of customers aren’t worth investing in, but 2020 proved to investors that it’s much easier for a company to continue running smoothly if the element of being physically present is removed, or at least greatly reduced.
The World Isn’t Ready for Another Pandemic, and Investors Must Accept This Reality
Of all the investment lessons from 2020 we’ve covered so far, the most disheartening one is probably the fact that the world isn’t ready for another pandemic of this scale.
Global pandemics are few and far in-between, so it comes as no surprise that shortly after a pandemic has ended, we start to become complacent and assume that another pandemic will never happen again.
Before 2020, virtually no annual report listed a global pandemic as a potential risk factor, and even the ones that did probably didn’t think it was a serious possibility. After all, the idea of a disease bringing the world to a near grinding halt seemed extremely farfetched, and as a result, was probably written off as a wild daydream rather than treated as a legitimate potential risk factor.
Unsurprisingly, the 2020 annual reports of many companies began to list a global pandemic as a risk factor, and a serious one at that.
This pandemic has taught us that, from a business standpoint, it’s extremely difficult to adequately prepare for a global health crisis. Even if a business assembles a team to help create a pandemic response, nobody knows for certain when the next pandemic will strike or how severe it will be.
If businesses can’t properly anticipate when the next global health crisis will be, then chances are most investors aren’t any better off preparing for one either.
A global health crisis is a classic example of a risk that has a low probability of occurring but has very severe consequences if it ultimately transpires.
To make matters worse, a global pandemic is the sort of risk that investors can’t possibly hope to manage or adequately prepare for. Sure, an investor can diversify what sort of investments they own, but nobody knows for certain how the next pandemic will affect the world. It’s very difficult to prepare for risk if you don’t know how that risk will ultimately affect you.
We’ve previously discussed the importance of adaptability as an investor, and how even the most detailed investment plans will always be subject to some kind of change.
When the next major health crisis strikes and markets around the world are impacted, an investor’s best bet is to be ready to adapt and change their plans at a moment’s notice. An investor who knows how to adapt and can make the most out of a bad situation will always outperform those who place too much faith in their plans.
Wrapping Up
After a quiet start to the year, 2020 quickly proved to be one of the most infamous years in recent memory, largely owing to the pandemic and its worldwide impact. Unfortunately, financial markets weren’t spared from the impact.
Despite the world turning seemingly upside down for many investors, there were plenty of lessons waiting to be uncovered.
Although 2020 is now in the past, it will be interesting to see what the short-term and long-term impacts of the pandemic will be on businesses and financial markets. Only time will uncover what those impacts will be.
