Desperate Measures For Desperate Times

As humans, we yearn for belonging; we want a shared experience. Psychologists will explain the evolutionary origins of this phenomenon – it’s human nature. Our experiences are all different and it’s not easy to understand exactly how people are feeling. This can make it hard to create these shared experiences as we naturally try to compare other people’s feelings with our own. The adverse effects of a pandemic reach people in many ways. When I see anger in social media posts, or just straight outrage in a supermarket queue, I try my best to genuinely empathise with them as I have no idea of the circumstances that precipitated such frustration. Often, I see people’s most important asset and income generator being destroyed in front of them by a cruel mix of a health pandemic, attempted mitigation system, and the cruelty of capitalism when on the wrong side of it.

After 20 years as an investment adviser and financial planner I thought I could share some suggestions that I really hope can bring these people some relief.

Understand what stress does to decision making

Ever notice how things become so much harder under pressure and how all good ideas come to you on holiday. Well, that’s physiology - not the cocktails. If you’re feeling stressed now and need to make some big business decisions, please first Google the reptilian brain and understand how compromised your decision-making is when under stress. It’s almost impossible to make sound decisions in such a mental state so take measures to overcome this. Of course, the easiest solution is to get help through a fresh perspective. If there is anyone who understands how reluctant we are to share financial information as a society, it’s a financial planner. If that is a step too far, work hard to keep the stress levels down through good nutrition, exercise and sleep - and for goodness’ sake don’t make a big decision on a Monday afternoon!

Context is king - then cashflow

In times of financial stress, it’s easy to focus on cashflow as it is our everyday. Furthermore, studies suggest we are unable to effectively manage more than one financial concept at a time, so it is often cashflow we focus on first.

I would argue the bigger picture - your balance sheet and financial plan - should be the starting point. Perhaps you can absorb the current crisis because you have been doing so well previously and have sufficient assets that will offset a period of lower income. Alternatively, you might only just be keeping the doors open; the impact on your future may be too great and now is the time to bail out.

Recency bias is your enemy

How the world was in 2019 should have very little impact on your 2021 and 2022 thinking. It’s easy to develop the ‘prediction addiction' of what the future will hold. If you must decide on continuing to trade on, winding up business, or changing career, it should be treated similarly to having invested in a bad share that used to be worth more than it is today. Just because something did well in the past doesn’t mean it will do well in the future - just look at the Trade and Exchange publication.

Your business isn’t who you are!

In my second year of law school, I failed badly. I thought my life was over and I was never going to achieve what I wanted in life. Fortunately, my father sent me to his wise old mate who was very successful. He told me I was assuming people would judge me by what I had done and what I owned. He was right, I was, and isn’t that the narrative we were all raised on? He suggested instead that, in life, we are judged not by what we have done but who we are.

Laying off staff and closing a business is much harder than failing a year of university but does the same concept not apply? Those people who love and care for you don’t care about how successful you are; they care about how you treat them.

Not all things in capitalism and politics are within your control

There is no return without risk. Sadly, risk is not always visible, and it is never predictable. If your business/career made money before the pandemic and you were clever at what you did, you could easily believe your earnings were 100% your own doing. There was no risk of that stopping given you maintained the same effort. This makes something like a pandemic feel so unfair - just ask sheep farmers with long memories how an industry can change overnight. Before Rogernomics, farmers had a set price for their sheep and wool. With almost no warning, at the behest of a government of which farmers didn’t vote for, it all changed…
No one would argue that shearers and sheep farmers don’t work hard for a living but that’s the system we’re in; it’s not perfect. Similarly, when an industry goes through an upheaval like this, it is all participants that are impacted - not just the ones who operate poorly.

Control premium is overrated anyway

In the investment world we talk about a concept known as control premium. I have seen it applied in two ways: the first is when someone pays more to control an asset or business. The second is where the value of a business is increased because of who controls it. I would say in the majority of New Zealand businesses, people give up higher returns simply to be the boss. This is certainly understandable but often detrimental to the family or employees who rely on the business. It also gives business owners and business leaders an unrealistic perception that they can control the forces external to them. This perception is currently being crushed so naturally it leads to a world of anger. With our investment philosophy, we gave up trying to control markets and market forces and instead look to survive them. If anything, it just makes life less stressful!

Stay diversified

During this pandemic it hasn’t been all falling values - even in Auckland. If you had a piece of the booming property market you’ve hopefully offset some of the damage to your business/career. Let that be a lesson to all of us on the importance of diversification. When we get out of this disaster make sure we all learn this lesson. It is applicable to your career as well as your investments. I often see people who work in an industry that they also invest in. I often worry about businesses who become their own landlords and couples who work in the same industry. If you look at those that are doing better through this pandemic, often it’s the ones who are diversified.

Make hard decisions

Too many times do I see people try to dig themselves out of holes they don’t need to. Whilst we have harsh bankruptcy laws in New Zealand compared to the rest of world, many times it is a better solution than trying to save face. This is a step not to be taken lightly – be sure to seek professional advice before even considering this option. Alternatively scaling down, pivoting, or re-training are all incredibly hard decisions, but hard times require hard changes. Forget about the non-financial reasons impacting the decision and be brave.

Borrow and sell smart

In tough times we often have to borrow from others. Remember, when dealing with debt, the cheaper the better. Maxing credit cards out is easy but will likely give you a headache later down the track. Family is a good option for help, but don’t risk losing a good relationship over a financial agreement which could have been avoided with sound advice and good legal structures. If you are lending to loved ones remember they are much riskier borrowers, so don’t charge them the usual bank interest rates unless you can afford to. Understand you could never see that money again and perhaps make sure the person you are lending to has discussed all the above points with you first.

If not borrowing money, we may have to consider selling assets to prop up whatever is struggling for us financially. I often hear people say “we can’t sell that - it has done so well for us!” To me that is exactly the asset to sell as it is fully valued and not distressed. Again, advice is essential here.

For many in New Zealand, and the world, these are hard times. But there is no need to struggle alone. There are options, there is support, and there is opportunity; diamonds are made under pressure.

Feeling the stress? Reach out. We're here to help. 

Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular investor’s objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.

Article By Sam Walter

About the Author

Sam Walter is an Auckland based Financial Adviser who has been supporting clients with their insurances and investments for nearly 20 years. Sam has over $90 million worth of private funds under his management and is great at motivating people to improve their financial behaviours.