A New Economy: Why I’m not buying Index Funds

I have always advised people that they should buy index funds like the SPDR S&P 500 ETF, instead of trying to pick stocks. That’s Warren Buffett’s advice too.

Index funds is a way to buy into the entire stock market of a country. It is a passive investment, where it doesn’t try to outperform the market. This is in contrast to active investing, which is trying to pick which company and stock will perform best. Generally, passive investing handily beats active investing.

The good thing about buying index funds is that you don’t need to analyse anything or read any financial reports. You don’t need to worry about buying the right company or sector. And if you just keep buying the index consistently, it will eventually make money.

But just like Warren Buffet who is still picking stocks, I don’t follow my own advice. I constantly think what is a good buy in response to the world around me.

Corona Virus has permanently changed how we move and work

There can easily be more lock-downs due to the virus. It can pop back up again anytime, and the government can shut things down again. It will be with us for a long time. People are going into survival mode and changing their behaviour.

Governments are going to be tighter about people moving around. Many people won’t even want to travel. It’s clear that we won’t get back to how we used to be in just a few months. Because of this, all related industries e.g. aviation, hotels, energy, commercial rentals, and tourism are all going to be affected for a while.

Staying and working at home will become more of a norm. Look at how we behave when we have to stay home. We use our phones and do video conferencing, we watch Netflix and play games, and we start cooking more.

So what does that mean? It means that the way we consume goods has changed. It doesn’t mean that we won’t consume anymore, but instead, money is flowing from one pocket of the economy to another e.g. you eat at home instead of eating out. Supermarkets get more business at the expense of restaurants. Another example would be Netflix beating cinemas and their landlords because people are watching movies at home.

Some sectors are going to be much more badly affected than others

The tech, consumer staples, and video gaming sectors probably won’t be too bad. But airlines, hotels, and retail, I find it hard to see how they will recover quickly. They will be on life support or declaring bankruptcy.

The stock market has been holding up surprising well despite this crisis being worse than the Great Financial Crisis (GFC) of 2008. The S&P 500 only went down about 20%. In the GFC, stocks dropped more than twice as much, about 50%. But this seems like a worse crisis than the GFC. The GFC affected the financial sector mostly, and restaurants and travel were still open. But this time, most if not all economic activity has ground to a halt.

I think there is a more downside, and waiting for a wave of selling to tip-toe back in. There will be an avalanche of bad news in the next few weeks, from millions of unemployed and the spread to other major US cities. I would like to buy when most investors are intensely fearful.

I would avoid index funds for now since it consists of everything, including the sectors which will struggle for a long time. It’s best to pick and choose good quality investments which will survive and even thrive in an age of panic and social distancing. I wrote about what stocks I’m looking at here.

Take care guys.

3 comments

  1. GFC was a balance sheet problem. Covid is a cashflow statement problem.

    With stronger (or at least less bad) balance sheets, companies can survive a bit longer, revolve credit lines etc. Prolonged income statement / cashflow statement depression will of course cause companies with borderline balance sheets to collapse eventually (can be quite soon for SME’s).

    The problem with post-Covid economy is that everybody already knows about it, and are positioning into communication services, virtual collaboration / work platforms, data centre Reits, SAAS, IAAS, e-commerce, delivery services etc. Should still do well as markets & demand have plenty of room to grow. But don’t expect lottery ticket wins within a short time unless you take risks in small start ups, which are more likely to fail than boom.

    1. Good analysis. Agree totally that everyone is already positioning in the post-Covid economy. I also think its quite impossible to expect big gains quickly in this market. Survival is good enough.

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