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Looking Back at 2020

It is the time of the year when commentators and analysts should think about revisiting the comments and analyses that they have proffered in the last 12 months. No one says that we should be right every time we put pen to paper. But we need to be held accountable for what we say.

Investors should try and do likewise. We should look back at the transactions that we have made during the year, no matter how painful that might be. Only by reviewing our decisions can we hope to improve.

In January, I looked at several snack makers. Little did I know at the time that Covid-19 would spread across the globe closing businesses and sending households into lockdown. But a couple of my favourite producers of nibbles have proved to be resilient.

Winners and losers

Hong Kong’s Vitasoy International (HKSE: 0345) only reported a 6 per cent dip in revenue for the first six months. What’s more, timely cost control enabled it to post a 29 per cent rise in operating profit.

Meanwhile, Nestle Malaysia (KLSE: 4707) registered a slight drop in revenue for the first nine months. But it was still affected by a slowdown in the hospitality sector.

In February I looked at department stores. It didn’t even cross my mind that one of Singapore’s oldest retailer, Robinsons, would call time on its business before the year was out.

The problem with many department store shares has been their deteriorating return on equity. This is the amount of profit that companies make on shareholder funds.

There was a time when these outfits could deliver exceptionally high returns in the double-digits. But these have dwindled to very low single digits, primarily because of competition from Internet retailers, and Covid-19 was the final straw for many shopkeepers.

Too close for comfort

In March, the full extent of the coronavirus pandemic was there for all to see. Many stock investors threw in the towel. It is a natural reaction in the face of crises. Given a choice of fight or flight, many will choose the latter. But it is the wrong response for long-term investors.

Problem is that all too often, investors stand too close to the market to see the bigger picture. It is like standing too close to an impressionist painting. The closer we are. the fuzzier the picture. But the further away we stand, the clearer the image.

Same goes for markets. By being overly fixated with the daily movement in stock prices, we are likely to see a mess of numbers and plenty of red ink.

The bigger picture, on the other hand, was serious interventions from central banks and unprecedented cash injections from governments. With so much available liquidity at ultra-low interest rates, it is hard to see stock markets languishing for long.

Extreme pessimism

By April and May, extreme pessimism had set in, with some income investors even questioning the sustainability of dividends. Admittedly, some companies had reduced their payouts. Some went so far as to halt them completely. But not all.

Some of the most affected were real estate investment trusts (Reits) and banks. Many Reits decided to cut back on distributions to provide support for their tenants. Banks were asked by regulators to be more conservative with their cash. As it has turned out, dividends have resumed, though it might still take a while to return to pre-pandemic levels.

Looking ahead

By the middle of the year, it became evident that the market had put the pandemic behind it, even though the deadly pathogen was still in our midst.

There was acknowledgement by even the staunchest stock-market bear that central banks would keep providing cheap money for a very long time. There was also an acceptance that governments would have little option but to continue providing fiscal support.

So, many investors sitting on the side-lines gradually returned to the market to climb the wall of worry. There are still sceptics out there who continue to believe that the pandemic is far from over. But that is a good thing. It is not until the last bear has capitulated that we can perhaps call an end to the stock-market rally.

Borrowed time, borrowed money

That is not to say that all businesses will escape the pandemic unscathed. Covid-19 has been labelled the “virus of truth”. And the reality is that too many businesses have been living on borrowed time, if not on borrowed money.

As investors, our best defence against future shocks is to build a diversified portfolio of shares. It is unlikely that we will pick the right stocks every time. But we only need to be right six or seven times out of ten to be successful. And if you made it through the 2020 pandemic, you should be able to make it anywhere. So, enjoy the festive break. You have earned it.

Note: An earlier version of this article appeared in The Business Times.

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Disclaimer: David Kuo owns shares in Vitasoy International and Nestle Malaysia.