Covid-19: The Great Differentiator

Image by Gerd Altmann from Pixabay 

Warren Buffett once said, “Only when the tide goes out do you discover who's been swimming naked.” In good times, everything seems to be gung-ho. It’s difficult times that differentiate among the good, the bad and the ugly. Covid-19 is a great differentiator. It has already started to show its impact. Many companies are complaining of an acute cash crunch as their operations have come to a halt. Some have cut their staff’s salaries. Others have plans to lay off workers. 

Covid-19 isn’t the real problem; it’s just made out to be so. It’s been two-three months of its onset and some companies are already teetering. In reality, these companies were never doing well. Only that they were able to hide their incapacities behind the veil of economic growth. If a crisis persists, everyone suffers, that’s understandable. But if in a month or two, your very survival is at stake, then that requires some close examination.

Many of these companies never built emergency reserves. They worked on hot money that optimistic investors kept injecting. The so-called “start-ups” are a case in point. Without any profits and in absence of fresh funding, they will find it hard to sustain themselves. Some will showcase greed and opportunistic behavior by their promoters and owners. It’s easy to lay off workers, so they will do so.  

Obsolete business models will start surfacing. Primitive ways of working that should’ve been dead but which survived on the ventilator will be exposed. Take for instance the auto sector. It’s production has come to a halt. Or aviation—there are no flights. If work can go on without travelling and flying, that itself raises the question how these industries flourished to date. Much of their demand was artificial.

Investors have a great opportunity to observe how companies respond to the pandemic. That will show their character and strength. Solid companies won’t complain about the situation; they would be busy adapting to the new normal. They won’t beg for government support. When things get back to normal, many of these not-so-good ones will also get back on their feet but the good ones will have actually thrived. It’s by investing in those good ones that you will build wealth.