Why an investor should never let a crisis go waste?

"Go get your mother and all her friends. They'll never see a fire like this again. It’s alright Charles. We have just got rid of lot of rubbish.”

Do you know these were famous quotes once uttered by a man who is known worldwide even today! His office and years’ worth of work was on fire and instead of crying or shouting in pain, frustration and anguish, he simply chose to be a “Stoic Figure” advising this phrase to his son… What a balanced reaction! Who was this man? It was Thomas Edison's Reaction to his factory burning down, at his age of 67 and these quotes were directed at his son Charles. It really shows why the great man was so successful…

After just three weeks, with a sizeable loan from his friend Henry Ford, Edison got part of the plant up and running again. His employees worked double shifts and set to work producing even more than earlier. Edison and his team went on to make more than USD 10 million, just 4 years later in 1918. In Edison’s own thoughts and expressions, when tragedy strikes, you must accept that it has happened and that you cannot change the past. Finding the opportunity to overcome the challenge ultimately makes you stronger.

How relevant these thoughts are even in today’s times post COVID-19! As they say: Every calamity comes with equal or greater opportunity. For investors instead of getting demoralized, its an opportunity to introspect and review their investment plans and portfolios. It’s an opportunity to take a step back and plan for future. It’s also an opportunity to arrive at learnings to be applied to their investment strategies.

There are 2 major learnings in this time of lock down for every investor:

1.  Do have enough savings / liquid investments to manage at least 6 months living costs. COVID-19 has been once in a century kind of an event (also called as “Black Swan” event). It is unlikely that such an event will happen at a global scale once again. But, can it happen at country level, local level or even individual level. Likelyhood of that is much more. So, when we have learnt and talked enough already about Emergency Funds for 6 months, but do we really follow this still remains a debatable question.

2.  Do a spending analysis  - In this time of lock down, we can clearly define the needs and the wants.  Majority of the population realized that, most of what we were spending on was not necessary or it was not a need. It was primarily a want or a luxury. Something that we could have done without, something that we could consider as only “Good to have” things…

Even though, it might sound very philosophical; it is this crisis that has taught us to understand our basic needs and necessities.  A need is something you have to have to survive or complete a daily routine task. Our day-to-day purchase of groceries, milk and routine supplies is a need. Whereas a want is simply the desire for something, in many cases something to satisfy a need. A want is not a necessity, a want is not a must-have thing and a want is clearly not required to live a simple fulfilling life.

Applying the same principle that we have learnt in this COVID-19 lockdown times to our investments and portfolios, we can clearly arrive at the needs and the wants we have. A concrete foundation that you create for your total portfolio is a need. Ability to build a strong core for your investments is a need. Without paying attention to this need, you cannot think of diversifying into your wants and let your portfolio run on high risk just like walking on a thin sheet of ice.

A very simple story that we can have an analogy for. There is an old man who owns a small farmland and he is worried that his son doesn’t understand the principle of saving money one day and one year at a time for big riches. He decides to ask his son to plant two small tamarind trees. After a month or so, every day now the old man asks his son to bring tamarind leaves for making a chutney / a dip for their dinner from one particular tree off those two trees he had planted. After a year, the father asks the son: “Which tree has grown taller and stronger?” Obviously, the tree which was allowed to build its foundation for a year and no leaves were taken from, had become stronger. Whereas the tree from which the son would keep on bringing the leaves every day, couldn’t grow and had stayed a small and weak tree and it had almost died. Now, even though the weaker tree had died, the stronger tree could support their needs for years to come, even after taking away a small portion of leaves every single day for their household needs. The stronger tree was so strong that it could sustain loss of few leaves and twigs every single day.

The same analogy applies to the investments. Definitely, look to have your portfolio fund your wants in future, but "Pay yourself first". Allow the portfolio to grow stronger and taller, just like the tamarind tree in our story. What do we mean by: “Pay yourself first”? It is a phrase which was first used in a book called The Richest Man in Babylon. But this simple statement has been converted into a profound personal finance rule by Robert Kiyosaki, the author of “Rich Dad, Poor Dad”. 'Pay yourself first' before spending a dime anywhere else means to build your portfolio first and let that portfolio fund your luxuries. The stronger the core of your portfolio, the longer it can sustain even in tough times. Stronger it will stand to fund your wants!

Finally, whether you want to be the first tamarind tree or the second tamarind tree from the story above, is anyone’s guess!!