In this article, I discuss how the relative importance of various investment criteria seems to have shifted as a consequence of the current coronavirus situation. Specifically, I highlight criteria that appear to have become relatively more important, as well as others that apparently are now relatively less significant.
I shall be drawing heavily on my own experiences from my investment firm, S. Ugelstad Invest AS (SUI), as well as on discussions with several members of the Lorange Network. A short note before we begin: while the various factors I’ll be discussing are presented in a dichotomised manner, the reality is that they are typically overlapping and, further, any one investor will tend to give different weights to each of these factors from those that other investors such as myself might do.
So, in the end, what will things be like in a post-corona world? Are we going to go back to the pre-corona criteria, or are we experiencing permanent shifts?
Note, too, that all the investment criteria I’ll be talking about, except for factor 1, in essence represent “check controls” – are these factors sufficiently relevant now or not? As such, the criteria represent qualitative hurdles to satisfy a project’s “goodness” (or lack of it), complementing the more conditional discounted cash-flow analysis undertaken under item 1 below. All the criteria I’ll be discussing in section 2, though, might fall into this category, representing additional “go” or “no-go” checks to complement the fundamental discounted cash flow analysis discussed in section 1.
I would like to make one more preliminary clarification, before we go into the specific arguments of this article. Warren Buffett, the famous US-based value investor, states that when he buys shares in various companies, he assesses the attractiveness of such investments as if he were considering acquiring the entire firm; in other words, his investment criteria are the same as those that the leaders of this firm follow in their corporate strategy. I agree with Buffett here; investment criteria for buying shares or corporations (or stakes in such firms) are essentially the same.
Keeping these caveats in mind, let us now move on to discuss the two sets of investment criteria – those which seem to be becoming relatively more important, as well as those with seemingly less relative importance.
Set 1: Six investment criteria that seem to be becoming relatively more important, in light of the new coronavirus reality
1. Go for relatively predictable cash flows in the investment projects being considered. “Cash is king!” This often implies a reasonable shift towards being relatively more short-term, in the sense that shorter-term cash flow criteria are typically those that tend to be more predictable when things are “normal”. Moreover, cyclical, as well as longer-term growth projects, should be avoided now (see more about this in paragraph 5 below). As a particular complication, this may also tend to stress the importance of who is the individual that is expected to deliver this cash flow – in other words, more of a “me, me, me” emphasis, in contrast to the “we, we, we” team thinking that up to now has been so fashionable. My sense is that this potential change is positive.
2. Disruptive technology. We can expect that certain types of technologies will become relatively more important, particularly those that have to do with digitalisation, i.e. those that enhance virtuality. More specifically, how can new technology help ordinary people today? Technological advances increasingly allow for a wide array of value-creation, above all when it comes to “distance”, such as virtual shopping, but also for so-called distance learning, remote conferencing and networking, working from home, and so on. This new wave of technology-driven advances, to make the new world of operating virtually more of a reality today, is however quite broad. It incorporates the emergence of new cloud-based approaches to “virtual routes to market”, allowing for new business approaches to assist other firms in becoming more virtual, etc.
There are also going to be significant technological advances in other areas, however, such as the development of more cost-efficient batteries (power storage, cars with little or no emissions, etc.), filter technologies, more efficient combustion, and so on, supporting ongoing advances in EGS (environment, government, society), also to be discussed in more detail under paragraph 6 below.
In general, new technology is going to be used to a much greater degree than before, and also much faster. It will be crucial to have the ability to understand better how new technology might open up possibilities for new business, and to take the time to analyse this. Finally, not to be forgotten is how technologies may work together in new ways with traditional methods or systems, how hybrid systems may be created, and how unique combinations of ultra-tech solutions may be merged, added to or streamlined with the older or more standard systems. In other words, it may not always be only about the new, but about how new technologies can be combined with what worked well beforehand to make things better and/or faster.
3. Virtual business focus. Businesses that can be conducted virtually are now to be preferred. I have already touched upon aspects of this under section 2, but I highlight some other aspects here. To respect social distancing is, of course, a part of this – in other words, to avoid close face-to-face interaction. In retailing, a focus on more basic products that may be categorised as generic (for example, potatoes or apples) and/or being associated with a trusted, well-established brand (for example, Nestlé) would be central here. Trust and simplicity are key! Luxury goods, on the other hand, might be more difficult to promote this way; physical “inspection” in stores might be needed, not least in order to trigger more of the impulse buying generally associated with non-essential goods. In this case, the typical customer will not be able to rely on established brands – at least not to the same extent – or to draw on what he or she might understand to be generic goods.
In general, we may safely conclude that traditional shopping, where products are researched, seen, touched and acquired in-store, has declined and will continue to do so. The new generation is so used to shopping on the internet from beginning to end, with post-purchase servicing, further acquisitions, CRM, communications, etc. all internet-based, whether via smartphone or PC.
4. Value chains. Can one rely on this? Are subcontractors able to deliver? (Many smaller subcontractors may simply not be able to sustain a long-drawn-out coronavirus!). To have a degree of direct control over the key elements of one’s value chain seems critical. Reliability is at the centre. This implies that one’s value chain could evolve into something more local. Reliability might be emphasised more over cost-efficiency. It follows that we may see a threat to the growth of world trade. Specifically, for the US, to rely on pharmaceutical compounds produced in China, for instance, rather than in the US itself, might now become less of an option. It costs more to go more local, but reliability and control increase! There is less of a risk of political blackmail.
5. Our core values are changing. People are becoming more concerned, worried and/or scared, and will be prepared to invest more in health, medicine and protective measures. Moreover, people now increasingly prefer to stay at home, and invest in business areas that might contribute to the upgrading of their houses (decoration, home improvements, etc.). Real estate in remote, rural areas will become even more attractive. People are prepared to invest in ways to both protect and isolate themselves.
6. Our ways of living, travelling and working are changing. This trend opens up new business opportunities for many. Investing in areas that might enhance our abilities to work effectively from home, to invest in new modes of remote conferencing, (Zoom, Skype, etc.) represent key opportunities. Areas that match these new ways of living, socialising and working have the potential to be of great interest.
Let us now turn to a set of investment criteria that might have become relatively less important, in the new reality of coronavirus. As we shall see, here, too, there are at least four key areas.
Set 2: Four investment criteria that seem to have become relatively less important, in the face of the coronavirus reality.
1. Growth focus. This needs to represent a key criterion during the post-corona period. The “problem” with it, however, is that it might be difficult or impossible to come up with good cash flow estimates. Some growth companies may indeed be in a non-profitable stage for long periods of time (Tesla and Uber, for example). These types of investment are tending to look relatively less attractive.
Paradoxically, the “we, we, we” culture typically associated with long-term growth may no longer be in vogue. Instead, as discussed in section 1, the spotlight will now be on the individual executive, preferring to “drive” short-term results, and be accountable for them.
I would like to add one final note with regard to perhaps, after all, pursuing some growth. There are always opportunities to make acquisitions or mergers, i.e. various forms of consolidation among corporations. This is perhaps a way to achieve growth in the context of today’s coronavirus reality. Members of the organisations involved are also likely to be more flexible and open-minded, less driven by conventional prestige or culture-based conservatism. It may be advantageous to look for such potential candidate firms for corporate restructuring.
Of course, categorising growth focus as possibly less important during corona times is based on the consideration of how we wish to define “growth” in the focus. What was meant by growth before may be different today or tomorrow. And thus, perhaps the word “focus” here is also important. The question remains of how significant growth can be now, but having a focus is timelessly crucial.
2. The environment. We are, of course, continuing to see a strong focus on the environment in public debates and in government circles. It is interesting to observe, for instance, that air pollution in general became less severe during the height of the coronavirus crisis, due to increased restrictions on travel. The problem, however, is whether companies might be able to afford the expensive EGS (environmental/governmental/societal) regulations imposed on them in the past. After all, the requirement to survive may now be the priority for many firms.
So-called “green-tech” thinking, as well as focus on the so-called “circular economy”, will of course continue to be positive. Platforms to support the circular economy will be attractive – simplicity, enabling, sharing based systems and economies (for example, buying used clothes). And utilising our natural resources better is always going to be good. The question is whether these aims can now be pursued with the same vigour as before. My sense is that such changes tend to be expensive, and that investing in these types of activities might not be all that attractive, at least for now.
It remains an open question whether we will be able to afford to return to the old EGS standards or not. These clearly continue to be important, but how should they be financed? Will there be more direct governmental subsidies, including tax breaks, when it comes to pursuing heavily EGS-driven investment projects?
3. As already noted, here too we tend to face rather uncertain cash flows. And, it is typically hard to put a value on such flows. There seems to be a clear trend to swing away from them.
It could be that an actor might have entered into a long-term contract with a given counterparty, where the latter is facing cyclical pressures, and thereby might be tempted to go back on his contractual commitment. In shipping, for instance, a charter company might be tempted to break a time agreement for this reason (higher freight income elsewhere!), leaving the charterer to cope with what may now have become a significantly more expensive project. And/or it may be that the charter company has simply become too economically weak to honour its commitment.
The core issue is, of course, that the underlying cash flow streams might be more uncertain than expected – i.e. a situation to be avoided!
4. Lack of social distancing. Some businesses require relatively large “concentrated” gatherings of people. Social distancing regulations might easily be contravened. The so-called “reopening” of economies is typically faced with this dilemma: safeguard people’s health by keeping things closed or stimulate economic activities by reopening. It is, of course, not only beaches and street traffic that are affected by this dilemma, but also several key business areas, which have now become relatively less attractive (retail stores, travel, hotels/restaurants/bars, concerts/sporting events/religious gatherings, and so on).
The world-famous value investor Warren Buffett, for instance, sold all of his airline-based holdings, involving four major US carriers. His reasoning was that it will take a long time, at least, before the social distancing negatives might be overcome for this type of business.
This brings us to the end of our discussion regarding how project investment criteria may be reprioritised. But a critical issue remains: what about opportunism by going “against the stream”? Would there be opportunities to be had by being counter-intuitive? After all, most attractive investment projects call for such uniqueness. Perhaps a more in-depth analysis of the various factors discussed in this article might be called for?
This is possibly the most important conclusion that might be drawn from the above, namely, to treat the set of identified investment criteria opportunistically, rather than mechanically. Good projects come about this way! But, a careful analysis of the various criteria is indeed key, in order to achieve this.
About the Author
Since selling his shipping company in 2006, Peter Lorange has been a successful entrepreneur and owner of a highly diversified family office. He is widely regarded as one of the world’s foremost business school academics, having held the position of president at IMD, Lausanne for 15 years, as well as several positions on shipping company boards. His entrepreneurial journey spans key areas such as education, shipping, investments and, predominantly, family businesses. Peter founded the Lorange Network, a digital learning and networking platform, in 2017. He is Norwegian and lives in Küssnacht am Rigi, Switzerland.