The world is no stranger to economic crises. But no two crises are the same.
A glance at human history shows that our past is filled with many instances of financial and economic stress.
These crises have taken different forms, as the spark that ignited them differs each time.
Yet, the common thread that binds these crises together is the resilience of the human spirit.
Despite the numerous casualties resulting from these events, our lives have carried on, albeit with some lingering after-effects.
Governments and central banks have become more proactive in stimulating the economy and buffering companies that are suffering from financial stress.
And through time, the world has managed to progress despite these challenges and obstacles.
The regularity of crises
In the last two decades alone, the world has been rocked by three financial crises and stock market crashes.
That equates to an average of one crisis every six to seven years.
The first was the dot.com bust that occurred between 2000 to 2002, resulting in a three-year bear market where dotcom-related companies plunged significantly.
The crisis was caused by lofty and often over-optimistic sentiment surrounding internet companies, as investors piled into loss-making and cash-burning businesses that had no hope of ever turning a profit.
Next came the Great Recession that lasted from 2008 to 2009.
This crisis was caused by an overheated housing market in the US and an over-leveraged banking system that encouraged risky lending to the questionable subprime mortgage market.
And now, in 2020, we are witnessing an economic crisis caused by the COVID-19 virus.
With many countries implementing lockdowns and movement control restrictions, a wide swath of industries from tourism to hospitality have suffered sharp declines in business activity.
As a result, there have been widespread job losses and many businesses are struggling to stay afloat.
Different crises, different impact
Investors need to understand how each crisis impacts their portfolio companies.
As the root cause of each crisis differs significantly, businesses may also witness different kinds of financial and operational impact.
Companies that performed admirably in one crisis may not react well to another.
Two examples that come to mind are Dairy Farm International Holdings Ltd (SGX: D01), or DFI, and Kingsmen Creatives Ltd (SGX: 5MZ).
Both companies performed admirably during the Global Financial Crisis.
Back in 2009, DFI managed to increase its sales by 4.4% year on year, while profit attributable to shareholders increased by a corresponding 9.3%.
As a supermarket and hypermarket operator, DFI was able to post solid results as grocery shopping is an essential activity that continued in despite the tough economic conditions back then.
Groceries were not the only activity in demand in 2009.
Kingsmen Creatives, a one-stop-shop for interior fittings, events, and exhibitions, saw its revenue jump 27% year on year in 2009, while net profit moved up 5.1% for the year.
This increase was mainly attributed to the opening of the Marina Bay Sands integrated resort in 2010, with an increased level of work being billed in 2009 in anticipation of the opening.
However, what were strong results in the past does not hold today.
Fast forward to today, both businesses are reporting weak earnings amid tough conditions.
For DFI, tough conditions have persisted into the first quarter of 2020 as the group’s overall performance continues to be significantly impacted by deteriorating consumer sentiment and movement restrictions.
Kingsmen Creatives has also reported much poorer numbers. Although revenue for 2019 increased by 1.4% year on year, net profit plunged by a massive 93.6%. .
From the two examples above, it can be seen that companies that fared well during the Great Recession may not necessarily continue to perform well during a pandemic.
Investors may feel puzzled by this observation.
After all, isn’t investing about buying into great companies that can withstand all types of crises?
The answer to that question would be — yes, but it depends on how we assess and define the risks relating to each business.
We also need to critically question why companies do well in one crisis but not another.
Is the reason related to the business model itself, or did they just happen to get lucky?
For DFI, it turns out its core food business was slow to react to changes in e-commerce, and in response, management instituted a Business Transformation Plan at end-2018.
For Kingsmen Creatives, its business was already facing signs of stress from a changing retail landscape and tougher competition as far back as 2015.
So, it can be argued that the reason for these two businesses to have done well more than ten years ago was due to latching on to the right trends.
However, as business circumstances changed, both businesses failed to evolve fast enough.
The COVID-19 pandemic had simply exacerbated the inherent flaws in each company’s business model.
Picking the right businesses
It goes without saying that as investors, we should try our best to select companies that can weather all types of crises.
Such businesses should ideally be agile, adaptable, prudently managed and have a strong competitive moat that will not be easily breached.
The idea is to find such companies and then own them over years, or even decades.
Investors need to critically examine the underlying reasons for buying companies within their portfolio.
Ask yourself these key questions — can the business survive a long winter? Is the business able to cope with different types of crises and yet emerge relatively unscathed?
And does the business have a strong franchise and track record of adaptability even under normal economic conditions?
Businesses that I believe possess such characteristics include Nike (NYSE: NKE) and Visa (NYSE: V).
In any crisis, there should still be a demand for sporting footwear and apparel. The fact that humans need to wear appropriate clothing and shoes for sport does not change over time.
This characteristic makes Nike’s business more resilient to economic crises, even though it may still suffer from short-term financial stress arising from reduced consumer spending.
For Visa, the trend of needing an intermediary to facilitate smooth and secure payments is evergreen.
While spending should decline temporarily during economic crises, the role of Visa as an enabler of digital payments and commercial transactions should stand the test of time.
These attributes are what make these companies bellwether stocks to own no matter what economic conditions we face.
Owning great companies is the key to investment success
So, the solution to navigating crises is to select and own sturdy, solid businesses over the long-term.
As time goes by, the steady and consistent growth of these businesses should reward you richly with dividends and capital gains.
And this, I must say, is certainly the smartest way to invest.
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Note: An earlier version of this article appeared in The Business Times.
Disclaimer: Royston Yang owns shares in Nike and Visa.