A year and half ago I joined a company that manages care homes: with the world population getting older and older, I thought it was the safest possible choice.
Everyone has a plan ’till they get punched in the mouth
a Nassim Taleb-esque Mike Tyson
Do you remember when we were scared by World War III? Or by the US-China trade war? Up to a month a go, the main Italian fiscal problem was longevity risk, how to pay pensions to a population that is living longer and longer.
Then a black swan happened and now we live in a new world.
Between managing the fastest bear market in history with your team working from home and the constant attention need of my nine month old daughter, I am trying to read as much as I can about the virus. I never understood people that received an alert to move because of an incoming hurricane or flood and stayed in their home: now I do. I understand people that think it will not affect me, I do not have to make the sacrifice to change my habits. Last year I read The Fifth Risk by Michael Lewis, it explains very well the importance of having smart people in government agencies to deal with our current problem, a problem that cannot be solved by a private company alone. It explain the risk of having as a president someone that denies these problems and by cutting agencies budget effectively works against them and the overall population.
As an assiduous student of risk and risk management, Taleb in many books explains why it is difficult to put in place the right policies to prevent catastrophic risks: the more the policy works, the less catastrophes you see, the less you appreciate the policy and the utility of agents who manage it. It is hard because a policy requires a cost or a sacrifice. Think about financial bankruptcies: to prevent banks to go bust, the government writes regulations to limit bank freedom to take risk. The less they fail, the more they complain about the futility of that regulation: why they have to spend money to comply with an anti-bankruptcy rule if there are no bankruptcies?
The same applies to current measures to manage the spread of the virus: the more we limit a person freedom of movement, the less the virus goes around and hospitals are less busy. At the same time you are bored at home, see the hospitals doing fine and ask yourself: why am I doing this? There is no need for it!
Did you have government bonds in your asset allocation in the last ten years? Why would you invest in something that returns fractions of a percentage when stock indexes are posting double digits gains every year? I guess the last month reminded you why.
The virus and p2p investments
If you want to deep dive into the consequences of the virus on small entreprises I suggest you to listen to episodes 164 and 163 of Patrick podcast: Invest like the best. Brent and Dan have a lot of experience working and investing in SME…and their expectations are pretty bleak.
Linked Finance introduced payment breaks for the hospitality sector and other borrowers on an ad-hoc basis: this is a sensible move, you want in fact to preserve your outstanding loan balance, there is no reason to put additional strain to a borrower and risk to have them default. Unfortunately, this only solve a liquidity problem, meaning it is a solution if the virus effect on the business disappear in a few months and the business can jump-start back when it is allowed to reopen. If you leave employees at home, of worse are forced to fire them, it is not a given they will back; maybe you will be ready but your suppliers will not. No one knows at this stage, but it is possible that the world on the other side will be quite different.
Lot of businesses will have a solvency problem, meaning their revenues will go to zero. Trying to solve a solvency issue with a liquidity solution is a recipe for disaster. As Brent says “the difference between a white knight and a loan shark is pretty thin”. You want to help the firm but you also desire to get your funds back: a yield too low will not compensate your risk, too high and you will add to the problems instead of being a solution.
Finbee adopted a way lighter solution: to promote business lending, they are offering investors a 2% premium, taken from their normal issuer fee. This means the cost will not burden on the borrower. Hopefully Finbee will be able to stand the loss of revenue: also platforms themselves will probably see less activity in the future due to scared investors, they risk to default themselves since a lot are still start-ups without stable profit base.
These are two highlights from the platforms I use, p2p-banking.com has a post on the general status of the of European p2p industry.
Should you invest in stocks or p2p loans right now?
First of all, yes you should continue to invest, if for example you are working and saving part of your salary. The market fall is scaring but if the world ends here, we will have bigger problems to manage. On the other side, do not try to fish for the bottom: chances you will get it are close to zero, you will most probably see the market bounce and then continue to go up while you regret and wait it to retrace to pull the trigger.
Before doing anything, take into consideration your strategic asset allocation and risk appetite; do not go all-in, whatever decision you take. Stocks return on average 7-8% per year and these include all past bear markets: if you invest now your chances to get an even higher return are quite good, especially if you avoid high valuation US stocks.
In the majority of cases, p2p platforms are facing their first recession, therefore past returns will have to be reevaluated lower to get a reliable long term projection; it will take months, maybe years considering the full post-default collection process, to assess real returns. If we consider all the other risks, my preference is for stocks right now.
What AM I doing?
Six months ago I sold a big big chunk of my portfolio because I am buying an apartment here in London and I needed the 20% deposit: I spent the first 5 months regretting to have sold so soon and the last one feeling like a genius; even if it ended up well, the truth is I took too much risk and I should have sold even earlier. Now a very small part of my NW is in stocks and I will invest any new saving there for this reason, including my employer pension. Maybe I will also stop reinvesting in p2p and shift part of the cashflows to stocks as well.
Talking about timing, two months ago Twino experienced some cash drag and I finally convinced myself to try their currency loans: I am now losing money on an investment that has a buyback guarantee, great! Obviously losses will be mitigated in the long term and as a prudent investor I only allocated 10% of my funds, but again another lesson against being too greedy: scared of losing some basis points, I finished losing full percentage points.
What I am reading now:
Follow me on Twitter @nprotasoni