It will be quite some time before we understand the full impact of the COVID-19 pandemic, but the history of such shocks tells us two things.
- Even in severe economic downturns and recessions some companies are able to gain advantage. Among large capitalization companies in the U.S. during the past four downturns, 14% were able to increase sales and earnings before interest and taxes (EBIT) margins. (1)
- Crises produce a myriad of creative, new changes – both temporary and lasting.
The COVID-19 pandemic has severely disrupted global consumption, business methods, and strategies — forcing people to unlearn old habits and adopt new ones.
New Habit Formation
A study on habit formation by Dr. Joe Dispenza (2) suggests that the average time to form a new habit is 66 days, minimum 21 days. Moving through the stages of this lockdown has forced many countries to change habits – and rather quickly at that – which had been the foundation of many facets of doing daily business.
Here at Terra Cotta Financial Group, we are a great example of being creative and flexible. Our team implemented a version of our Corporate Disaster Recovery plan and, having no wired infrastructure, we all easily transitioned to work from home, and conduct video meetings with each other, our clients, and our prospects. We are more efficient, collaborative, and productive than ever.
We totally broke free of old business habits. Meetings in the office, boardrooms, whiteboards, etc. Did we want to pivot? Not really, that is just the way it is – but it has worked out really well and we see no reason to return to the old ways. (On a personal note: I have really upgraded my t-shirt and jeans wardrobe.)
The Pandemic Pivot: Shifting Changes
Consider the shift away from retail shopping to online shopping. Will this be a structural, permanent shift or just a temporary knee-jerk reaction? If it becomes permanent, consider the massive ramifications to commercial real estate.
A shock like the COVID-19 pandemic can produce lasting changes – some good, some bad. The firms that quickly spot changes and adapt their business models while continuing to deliver – or improve – their product and/or services, will gain market share, sales, and EBIT.
Conversely, it’s easy for many companies to “turtle” and dig-in on old habits and disciplines. We’ve all heard the phrases: “Because it’s always worked for us” and “When times get tough, get back to your fundamentals”. However, it is in times of crisis where lateral thinking and new approaches are most valuable.
Reshape Thinking
If I can thank this pandemic for anything, it has forced us to reshape our thinking and thesis on every portfolio holding. Now, our Investment Committee looks deeper into these potential structural shifts (considering the new normal) and is focused on developing a thesis and strategy on every new addition/replacement in our model portfolios.
We are looking beyond traditional asset allocation, security selection, and fundamental financial analysis to build and protect client assets.
If you have any questions about your portfolio, contact us and we’ll be happy to have a discussion with you.
Stay well,
Bruce
(1) Harvard Business Review Sept/Oct 2020
(2) Change the Habit of Being Yourself – Dr. Joe Dispenza