Resiliency In The Face Of Disruption


Shane Parrish had a post titled Stop Preparing For The Last Disaster. This is a point I've made many times before (no claim of originality). We already had a Tech Wreck, the next one was going to be different. We already had a Great Financial Crisis (real estate bubble and liar loans) the next one was going to be different. We are now in the next one, it's a pandemic, it's different than the last two and the one after this one will be it's own unique crisis.

How resilient were you against those events (assuming you're old enough to have been exposed to all three)? Were you aware enough to isolate what you needed to improve resiliency wise and have you taken steps to do so? If not, hopefully you have isolated what changes you need to make.

A lesson from the Tech Wreck was not to forever eschew tech/internet stocks but to watch the sector weightings. We've talked many times here about a 30% weight for one sector in the S&P 500 not being sustainable. Tech is above 31% right now, so I take that as a warning. I do not want to be overweight tech, that is a very risky proposition. If tech ever imploded to be some much smaller weighting in the index then it would make sense to explore the possibility of going overweight.

The big lessons from the Great Financial Crisis were related to over-leveraging yourself into more house than you can afford, not that you should never own a home. I realize there is a school of thought that says you should rent all your life which I think is sub-optimal because 20 years later you have no home equity and so you have less optionality than you otherwise would. If you have a 15 year mortgage, you could find yourself very young with no mortgage (or rent equivalent) for several decades. Continuing the example, being 50 and mortgage free provides enormous resiliency and optionality.

The current event has been different (the market manifestations though have not been different) in that it has threatened and disrupted more aspects of life beyond financial markets and asset prices. Stores closed, people told to stay home from work, colleges shut down, schools shut down, empty super market shelves (more so a couple of months ago) is broader and deeper than what happened 12 years ago. The lesson is not that we should focus on having hand sanitizer and bleach wipes (we should have those things but they are not at the top of the list) but we should think about what disruptions really impact us. No food is bad, have extra food. Also along the lines of things around the house besides bleach wipes, maybe have batteries, a couple of flashlights, matches, propane or charcoal for cooking, bottled water if you normally drink from the tap, few gallons of gas for your car and so on. The idea is not resiliency in the face of Covid, but resiliency in the face of disruption regardless of the cause.

I think physical resiliency is crucial as well. Getting fit is very simple, we need to exercise and cut sugar consumption. Simple doesn't mean easy, it can be difficult for people but knowing what is needed is what makes it simple. Whether intuitive or not, Covid seems to disproportionately effect people with chronic maladies associated with metabolic syndrome. Generally speaking, all aspects of life will be better without hypertension, without blood sugar issues and without being overweight. The inputs are within our control with a good chance at the outputs we want.

We talk all the time about financial resiliency. The most direct path to financial resiliency is living below your means. This makes it easier withstand job loss, or job disruption in the case of Covid. Having a little cash, actual notes in an envelope somewhere in your house, set aside for who knows what is smart not just for actual disruption but also for convenience (we paid a plumber in cash once and it was $80 less for whatever reason).

In terms of portfolio construction, cash is an asset class that represents optionality. For people in the withdrawal phase, cash set aside for some number of months of expected income need means not having to do a lot of selling after a large decline in order to pay the bills. I also am a big believer in having a couple of holdings likely to go up when broad markets are going down.

In all aspects of life it is better to do this planning ahead of time to avoid things like having to wait for three hours in line to get into the Costco because you have no food. All of this hopefully contributes to emotional resiliency which I promise will reduce at least a little of the stress that these events create.