The COVID-19 pandemic is a once-in-a-generation event that has completely transformed our world. Earth’s usually buzzing cities, with their dazzling restaurants and hotels, are a pale shadow of their former selves. And with more than half of the global population under some form of lockdown, nearly every industry is being severely impacted. 

Devoid of custom and vital cash-flow, thousands of businesses across all sectors remain in peril. Many of them, unfortunately, will simply not survive. Yet, there is a glimmer of hope. Because, even in the hospitality industry – surely one of the hardest-hit – there are some exceptional companies that are still somehow thriving amid these testing and uncertain times.

In this article, we will examine why some firms are faring better than others during this coronavirus pandemic.

How will the post-pandemic world be different?

With millions of people’s livelihood on the line and trillions of dollars being pumped into the global economy, future generations will mark the year 2020 as a distinct event. Our world has forever changed. The effect of these trillion-dollar stimulus packages combined with ultra-low interest rates (0.25% in the US, 0.1% in the UK) is that money is no longer valuable.

 In a world of fiat currency, where money is printed at the discretion of governments, money itself is only as valuable as the total amount of goods and services that can be purchased within an economy. 

Given the sharp deceleration and contraction of economies across the world, the total amount of goods and services will inevitably decrease. Yet the aggregate money supply within the system is significantly expanded thanks to these stimulus packages. Consequently, we arrive at a world where more money is chasing after fewer goods and services, which invariably leads to much higher inflation.

Increased inflation erodes the purchasing power of money, which degrades living standards in the long-run. As a result, cash will become increasingly worthless and cash as an asset will come under increasing attack. After all, would you invest in a stock that earns a 0.1% return per year, whose real value degrades by 2.5% every year even before the crisis? Obviously not. Yet these are the exact characteristics of cash. Investors will increasingly realise the precarious position of cash and take flight from it.

That is why many of the best investors and wealth owners have switched away from cash into other, alternative asset classes. You may wonder if equity (stocks) is the answer. Unfortunately, unless you enjoy the inherent volatility associated with them, they are not the answer. 

But there are alternative assets investors are increasingly turning to. They are shareholdings in strong-performing private companies that combine high profitability and a lack of price volatility (due to their privately-listed status).

So, what are these alternatives?

We believe (along with the likes of Ray Dalio) that there are two types of assets that can thrive in the post-pandemic world:

• Simple essentials with an unleveraged balance sheet -> these businesses provide essential products/services within the economy and are prudently managed, with a low level of debt. They will provide healthy dividends and modest capital appreciation to investors in the long-term.
• Creative and innovative companies -> these are the Teslas and Le Bijous of the world which are run by highly sophisticated individuals who collaborate effectively to deliver products and services that are in-demand. They have strong fundraising abilities and are capable of increasing the value of the business by multiple factors, whilst delivering exceptional capital appreciation to investors.

Businesses that thrived during the pandemic

Despite the massive economic toll the COVID-19 pandemic has exerted on the world, some companies are not only surviving. They are thriving. They can be divided into the following categories.

Essential goods manufacturers

Being a respiratory virus, COVID-19 has led to soaring demand for personal protective equipment like facial masks, respirators, and medical gowns. As well as ventilators. As a result, companies that previously produced such equipment (mostly in China) experienced a surge in demand and thus benefited hugely from the pandemic.

However, it would be inappropriate to immediately jump to the conclusion that that one should be investing in medical equipment manufacturers based on the experience of the pandemic. The current pandemic might be respiratory-related and thus requiring a huge number of ventilators. However, the next one might not be. So owning a ventilator producer would do investors no good. 

Thus unless one can accurately predict the nature of the next pandemic, then it’d be futile to invest in manufacturers that thrived this time. More importantly, global pandemics on the scale that we have just witnessed are an extremely rare event. The last major outbreak was the Spanish Flu in 1918, which infected 500 million people globally (⅓ of the population) and resulted in 50 million deaths. Betting your life savings on a one-in-a-hundred-year event seems to be a rather longshot and ill-advised.

Creative and flexible companies 

Another group of companies that performed well during the crisis are those businesses whose operations are creative and flexible. What do electrical supercars and ventilators have in common? They come from the same factory. During the first few days of the pandemic in March when the ventilator shortage was acute, Elon Musk, the CEO of Tesla, promised to use his engineering team and production lines to create thousands of ventilators. Less than a month later, a working prototype was released and quickly received positive feedback from the medical community.

Being a carmaker, the traditional economic theory of specialisation dictates that they would be ill-suited as ventilator manufacturers. Of course, why wouldn’t they? After all, ventilators and cars have little in common on the surface. Yet the engineers in Tesla managed to find common denominators in their underlying mechanisms (using electrical energy to create differential pressure chambers). So, they used Tesla Model 3 components to create a Tesla ventilator. They then redesigned the production line in Tesla factories to enable the rapid production of these products en masse.

The creativity and flexibility displayed by Tesla is what will drive their success. Whilst other manufacturers like Ford are agonising over the financial pain being inflicted by the virus, Tesla used its ingenuity to take proactive measures to not only safeguard its financial future but also contribute positively in the fight against the pandemic. 

Another example of such creativity lies in the Swiss hospitality company, Le Bijou. Instead of becoming resigned to defeat, like the majority of the industry, the Swiss quickly turned their apartments into quarantine sanctuaries where guests can rest and self-isolate in comfort.

Thanks to Le Bijou’s investment in remote management technology, the apartments can function autonomously and guests don’t need to come into contact with staff (who are nevertheless available nearby on-demand to visit the hotel to clean, cook or deliver goods). 

The “contactless living” hotel was exactly what was required during the pandemic. In fact, even at the height of the pandemic, the company never saw the occupancy rate drop below 50%. The average booking length actually increased to a fortnight during March 2020. Le Bijou’s remote management modus operandi has proven to be such a success that the hotelier is now raising capital from investors to further its expansion.

Hunters vs. target shooters

Rifle shooting is one of the most engaging sports known to mankind. Before a marksman takes a shot, he needs to consider an array of different factors. Ranging from the distance to target, to the weather and the effect of gravity. There are two main types of marksmen: hunters and target shooters. The former go out into the field to kill game (usually for conservation and food) whilst the latter shoot predetermined targets for entertainment and competition.

What we found after observing hundreds of riflemen of both sorts, was that hunters excel in the field and on the range equally well. Whereas target shooters struggle to perform accurately in the field. This is perhaps unsurprising. Hunters are confronted with a wide range of variables that throw up a range of unpredictable circumstances every time they take a shot (e.g. posture, distance, angle, target size, aim point). So much so, that they need to process this information and reach a conclusion within just a few seconds. 

On the other hand, target shooters have a much easier time as the shooting distance and target dimensions are already known. All they have to do to shine on competition day is train under the same conditions with the same setup. However, when confronted with parameters outside of their usual training regime (like those found in the field), they soon struggle to compute the variables and thus their performance becomes seriously degraded.

The moral of the story is that people who face a variety of different situations will regularly adapt better and be able to resolve new problems far more quickly than those who don’t.

The same is true in business. Creativity and flexibility are the foundation of human ingenuity. They enabled humanity to survive the jungle, despite being a less-than-all-powerful mammal. And such attributes also enable businesses to survive any stormy economic conditions that may occur. 

Finding companies whose management and business model displays such traits will surely serve your portfolio well. As demonstrated in the Tesla and Le Bijou examples above. This should be the guiding principle of your investment process.