Over the last few months almost all countries in the world have been faced with the challenge of how to handle the threat from the highly contagious Corona virus. The governments of most countries have elected to “close down” their economies, at least to some degree, so as to contain the spread of the virus, and thereby also to “flatten” the curve of those that might be in need of hospital support, as a consequence of the virus. Some governments have had more immediate reactions than others when it comes to imposing rules for societal lockdowns, thereby apparently contributing significantly to a more successful (initial) management of the virus, including saving lives. Other countries have decided not to impose such stringent lock-down rules, relying instead on the belief that its population shall become self-immunized through exposure to the virus (Sweden) or that this pandemic might not be that serious after all (Brazil, Mexico). But, Sweden, guided principally by the leading epidemiologist Dr. Anders Tegnell, seems to have been largely unsuccessful so far, with a death rate (as of 6th June, 2020) of more than 4500 while its closest neighboring country, Norway, had less than 10% of this, with Norway’s population being about half of that of Sweden, around 5,4 million versus Sweden’s around 10 million.
There is undoubtedly a lot of tension when it comes to closing down, or now continuing to keep fairly closed, versus re-opening, among the experts from both sides. Typical agreements for the closing down-side are: “we cannot deny the data”, or “human lives have infinite value”. Typical counter-arguments, from the re-opening side are: “we must salvage the economy, and ameliorate extreme recessionary effects”, as well as “economic recession (by not re-opening) might lead to health problems in their own right, at time serious” (lack of food; psychological; …), and how to handle this trade-off is certainly not becoming any less difficult in light of the fact that a second wave of the Corona virus may be on its way - _% of experts/governments/epidemiologists feel that a second wave is due; or WHO reports that there is a _% chance .) … Or, as us world-known epidemiologist Dr. Antony Fauci says, “it has devastated the world, and it is not over yet”! The Head of the World Health Organization exclaims: “this microscopic virus has humbled all of us!”. We ordinary citizens and business leaders are caught between two groups of opposing specialists, epidemiologists/scientists versus economists/social scientists, between adhering to social distancing versus accepting social impacting. No wonder that we may slowly seem to be giving up, at least when it comes to what seems to be the case for key countries such as the US.
Politicians, always with an eye to their own re-election, are typically willing to re-open economies, despite the health concerns. And, they are often supported by many of us “ordinary people”, who might have become impatient or restless when it comes to the effects from lock-down, feeling perhaps that their own democratic freedom is being impacted or limited. They may claim social justice as a rationale for re-opening. And there can be no doubt that the economic pain has been and continues to be enormous in many parts of the world. The Federal Reserve estimates, for instance, that a recovery is likely to be rather slow, with US unemployment being at a staggering 9.3% level by the end of 2020, and this is assuming no second wave of the Corona virus outbreak!
Are some countries/communities opening up too soon? Is it possible to make gradual re-opening safer health-wise, with testing and isolation of emerging cases? Is a relatively uncoordinated re-opening among different regions (states in the US, the Balearic Islands in Spain, …) working well enough? These issues are, of course, being hotly debated.
The scientific community is, of course, working full steam on developing an effective vaccine. To develop new types of vaccines, properly tested out on large samples of humans to confirm their safety, has typically taken up to 10 years, so far. At present, several research teams are working over-time to develop an effective new vaccine for fighting the Corona virus. And, both the US as well as EU have already now committed resources to prepare for rapid scale-up and mass production, which is remarkable, given the fact that we do not know yet when a workable new vaccine has been found. But it is all a matter of saving time! Those countries which have practiced relatively strict measures to contain the virus, i.e. “flattening” the contamination curve, have thereby probably gained an advantage, in the sense that the “delay” threat of contaminations of many citizens may now be ameliorated through vaccination.
So, the key question is when we might have an effective vaccine available. Our epidemiologists shall probably be able to gain an “upper hand” relative to the re-opening/economic experts if a relatively early timing for the arrival of an effective vaccine can be established. The benefits/costs of maintaining strict preventive efforts can then be more readily justified.
So, where are the business leaders in all of this? Which types of businesses are likely to benefit from a lock-down? Are there differences of opinion in terms of business sector, size and type of company, leadership? Conversely, which are the ones that, above all, might benefit from a re-opening?
I have been struggling with these issues when it comes to my own company, S Ugelstad Invest (SUI) which has some 28 active investments. In the following I shall refer to some of my own experiences based on SUI. I shall also share with you what seems to be some of the key learnings, at least for me.
Among the category of those who may benefit of a fast re-opening, we have businesses such as some types of basic manufacturing. (relying on assembly line-type processes), construction, hospitality (hotels/restaurants), much of the transportation sector (airlines, ferries, …) as well as most types of retail stores (except for basic food and pharmacies). And, as Peter Brabeck says (Chairman Emeritus of Nestlé, and current board chairman or director on several large organizations’ boards): impulse products in retailing – you need to see them in (now closed) stores! (Lorange Network Webinar, 2nd June 2020). Large gatherings are also typically no longer ok, such as sports events, conferences, schools/universities, etc.
For many companies, it seems critical that they are able to successfully “shift gears”! Initially many companies had to close down much of their business activities. The Norwegian digital events organizing company, Deltager, for instance, lost around 90% of its income within 1,5 weeks in March when the government imposed their restrictions
Later on, however, with a gradual re-opening if many economies, including Norway’s, as a function of successful amelioration of much of the Corona virus threat, to shift gear once more for many businesses seems key, now to “full steam ahead”! More resources might perhaps be allocated to marketing again, to take advantage of the re-opening, to gain new market share. Deltager, for instance, is presently enjoying higher income than it did at the same time last year! Dynamic thinking is thus called for: First break, then re-accelerate!
Let us, however, now first refer to some of the key learnings from the SUI experience. At the start, let us emphasize what seem to be a confirmation that SUI’s basic strategy still seems to hold in light of the Corona virus threat.
Focus on high-tech, with particular emphasis on IT which might open up for virtuality
Only moderate to no leverage, with emphasis on a conservative break even
Go for projects that have established revenue, real customers, documented demand, in contrast to merely “good ideas”
Work primarily with solid partners
Invest in minority positions primarily
Reduce complexity; it is harder to stay on top of your business or investments when your structure is not simple
Rethink everything, constantly
Adopt co-creativity and a collaborative spirit
As discussed elsewhere, SUI is active in five major business areas. Let us now discuss some of SUI’s experiences in light of the Corona virus crisis when it comes to each of these:
Stocks/bonds. We have reduced our stock exposure considerably. We are however engaging in several relatively small forward contracts, such as betting on the future levels of various stocks. And, we are maintaining our bond portfolio “as is”.
Shipping. We are not making any major changes here, but continue to focus primarily on relatively local trades (Baltic, Northern Europe, Adriatic, West Indies, …) and at least 50% on b/b (NB: spell this out) charter. We have reduced our exposure slightly and are now involved in around 15 projects only. Our major concern: Are our b/b chartering counter-parties able to continue to serve their commitments to pay their b/b hires in the face of a prolonged recession? In addition, we are trying to sell some shipping assets that are doing well to free up more liquidity to be able to “invest more at bottom” ?
Real Estate. We are continuing more or less as before in the US (retrofitting – middle expense level residentials), Norway (land development) and Bulgaria (leisure). Major concern: the ability for ordinary consumers to pay their rents and/or property purchase prices in the face of a long-term recession.
Ventures. Most of these are still doing well. The exceptions are WIN Systems; where we are seeing no business activities any longer, in the software market for gambling, A-Beauty; where we see have seen a dramatic drop in demand for luxury-type products,
Educational. We are continuing to adapt the Lorange Network (LN) offering. Although we have not been able to conduct the physical seminars that we have wished for, we have focused much more heavily on Webinars, our Deal Wall, podcasts and articles. In a sense, we have always been digital, but we have become even more so during the Corona lockdown.
It goes without saying that this strategy was developed several years ago. Further, it seems to be a key advantage when coping with the Corona virus threat issue that a realistic long-term strategy can be maintained as is.
There are, as we have seen, also potentially beneficial aspects for many businesses when it comes to societal regimes with extensive social distancing. Working from home can lead to significant office cost savings. And, to accept more advanced uses of IT-based communication technologies can typically now more easily be implemented. Elsewhere, “difficult” restricting can now often be implemented smoothly, since most people affected might more easily understand the necessities of such moves. Layoffs, for instance, can now typically directly be implemented.
There is no doubt that the advent of the Corona virus threat, and the generally dramatic government-dictated shutdowns in many countries might also have led to a sense of added acceptance of the need to accept hardships, as well as an added need to be more flexible by many citizens. For many companies, openings to implement rather radical changes might thereby have been central. To negotiate old contracts regarding rental levels, say for office space, delays in payments (loans, rent), lessening of levels of salary payments (now often partly matched with government support), even layoffs of employees, might now be more achievable to pursue. Changes might often be implemented which would be hard to achieve during more “normal” circumstances.
So, how can we better understand this apparent conflict between closing down versus re-opening, between the epidemiology scientists and the economic experts? What is the relative power of influence of each group? To understand this better is key for us businesspeople, i.e. to see which ways this trade-off is evolving, when shall a re-opening start to take place. On the surface of it, the closing-down epidemiology experts seem to have the winning arguments; to save lives! They typically take, we might say, a more long-term point of view. But as times goes on the tide might tip more over to the re-opening side. The pandemic may now be more under control. Therefore, politicians may increasingly put weight on their own standings with the electorate above all, many of us “normal” citizens, who are neither experts nor politicians, might become increasingly impatient, even restless!
So, re-opening becomes the norm. The economic experts (and the politicians) have “won”. This might be exasperated by large demonstrations, such as those we saw calling for judicial reform after the death of George Floyd, no social distancing here! (And the statue of the 17th century slave trader Edward Colston was even removed by demonstrators and pushed into the Avon river in Bristol, UK). Impatience among large groups of ordinary people took over. Social distancing was ignored, despite warnings from epidemiology experts and politicians.
But, is there something more than monitoring the basic sentiment of society when it comes to impatience? Yes, there seems to be. In a recent book, Professor Tom Nichols (Naval Postgraduate School and Harvard) points out that the following: ignorance among us common people seems to have a more profound (and negative) effect. We are now even increasingly proud to be ignorant. To reject advice from experts increasingly seems to be seen as showing autonomy – our democratic right, some may claim! “My ignorance is just as good as your knowledge”, the author quotes, citing Isaac Asimov (p.1). All those who Google, seem to be reclassifying themselves as instant experts! This is accentuated by the speed and global reach that characterize social media today, even though it has been warned that often social media can be inaccurate and even plain wrong. The Dunnig-Krüger effect states that “the dumber you are, the more confident you are that you are not actually dumb” (Nichols, p.44).
However, experts can, of course, be wrong too. Over-confidence is perhaps the most problematic issue for many experts. And, related to this, when well respected experts move from their established fields of expertise into new ones, things often go wrong for the expert.
For SUI this has led to two strategic shifts, both motivated to ameliorate potential misjudgments by us, and to “stay conservative” rather than to speculate on a quick upturn:
We are generally much more conservative when it comes to our investing. We now prioritize to continue to support existing commitments in case any of these might run into cash-flow problems, rather than to enter into new projects.
“Cash is king” for SUI too. In line with this we are selling our 10% share in Cape-max oil carrier, and we are considering the same when it comes to our share in Affibody.
So, we individuals who are also active in business are faced with a third set of judgements to make, which may input the call for re-opening faster, i.e. diminishing the influential power of the epidemiologists and adding to that of the economists/social scientists and to politicians: How do we judge the “crowd” sentiment of the common people? Are there “triggers” for instance, that might lead to an acceleration of the crowd’s impatience? Is an event such as the brutal police misuse of force leading to the death of George Floyd such a trigger?
What might seem as if things have gone out of control, with massive demonstrations worldwide defying social distancing, may simply represent signals to us in the business sector that re-opening might be happening sooner rather than later!
It is of course hard to guess what to expect. How “deep” is the upcoming depression going to be, and for how long will it last? Are governmental measures going to work? Are we going to experience a second wave of Corona virus, or perhaps even a third wave? While the implication for SUI seems clear when it comes to a relatively moderate and short-term depression, it seems clear, unfortunately, that SUI shall have problems, perhaps rather serious ones, if the recession we are facing is going to last for longer and be significantly more serious.
What are some of the key learnings from all of this? In general, it seems clear that we should listen relatively more attentively to our epidemiological experts, i.e. remain disciplined! The contrasting view, generally taken by economists, i.e. to “open up”, is often de facto motivated more by shorter term hopes for economic gains and are typically politically driven. The public’s fatigue factor further underscores that we might be safer sticking to the epidemiologists’ advice!
For SUI the key learnings from the Corona virus threat seem three-fold:
A well-balanced portfolio of assets seems to be important, especially during the type of crisis we are experiencing.
Speed and resoluteness seem to be key. Modifications in one’s strategy should be done with speed, and without falling into the trap of “hoping for a future miracle”.
Conservatism when it comes to new investing perhaps above all to conserve cash (“cash is king”) seems appropriate.
But we are, of course, all struggling with finding good answers for how to cope with today’s dramatic crisis. Please get in touch with me regarding questions and/or comments.
REFERENCES
Nichols, Tom (2018), The Death of Expertise, Oxford University Press.
Lorange, Peter (2019), Adaption and Flexibility in the Family Firm: A brief history of S. Ugelstad Invest, Smøyg.
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