Irreversible

After seven and a half months of working from home, I have finally had enough.

Driven by a desire to insert a bit more separation between work and life, I put on my mask, boarded the Jubilee line, and headed for the office.

To say the experience was an eerie one would be an understatement.

The normal hustle and bustle of Canary Wharf replaced by the echo of footsteps in the underground hallways.

The office floor that used to house hundreds of people, now empty. I was actually startled to bump into another person at the water cooler. Together, we’ve pondered the sign that assured us the machine was sanitized hourly.

Walking back to my desk, I passed cubicle after cubicle that looked like they’ve been abandoned in a hurry.  Printouts and presentations still lying around.  Deal toys and family pictures. Jackets and ties slung over chairs, some belonging to the people no longer with the bank.

Back in March, the world was divided into two camps. The usual handwringers, telling us things will never be the same. And the optimists, treating Covid as a short-term disruption before the world reverts to normal.

By nature, I usually find myself in the latter camp. In fact, as I look back on the post I’ve written at the very depth of the crisis, I am pleased to find the following quote:

It may also be tempting to cash out and sit out the volatility.  I can’t blame you.  But rest assured – when we declare victory against the coronavirus, it will be far too late to “get back into” the stock market.  That ship will have sailed.

Seven months later, we are still far from declaring victory. At the same time, the stock market is notching up all-time highs.

As ever, selling at times of panic was a BAD idea.

And yet, the handwringers may well have been right – because some things will never be the same.

Pain And Gain­

Zoom, having started the year at $67 a share, has gone up nearly ten times.

By the time May has rolled around, Zoom’s market cap has exceeded that of the world’s biggest seven airlines.

I’m not sure where it stands today, but that’s beside the point. What’s important is that thanks to Zoom, my travel intensity will likely decline by 75%, even after things go back to “normal”.

Instead of waking up at 4 am to catch a 6 am flight for a 9 am drafting session in Milan, I now wake up at 7, have breakfast with my kids, and can even squeeze a nursery drop-off before kicking that same drafting session off in the comfort of my home office.

Travel costs? Zero. Carbon footprint? Zero. End result? The same.

If that’s not progress, I don’t know what is.

Am I going to jump back on a flight for an important strategic review or a relationship meeting?  Of course – once there are actual flights to jump on to.  As I’ve recently found out, no one flies at 6 am anymore.

But let’s not kid ourselves by thinking business travel will ever go back to pre-Covid levels.

Airlines will be in a world of pain for a while longer, but that’s just the tip of the iceberg.

Back in May, my colleagues on the trading side of the business were stressing out over the ability to do their jobs in a remote working environment. Five months later, the banks are heading for the best trading year in a decade.

Perhaps being surrounded by six screens and hundreds of strung-out colleagues isn’t a pre-requisite for making money after all.

Cue in office rents, another big items on the CFOs cost-cutting agenda at the moment.

As Monevator’s latest post helpfully points out, commercial property operators are talking a good game – but their offices are mostly empty.

Of course, at some point, folks will go back to the office – at least on a part-time basis. But you can be pretty certain that as leases expire, businesses will move quickly to right-size their property footprints.

It simply doesn’t make sense to keep paying an extortionate amount for Bob’s desk in the City if Bob is camped out in Henley-on-Thames, showing up to the office once or twice a week.  Say hello to flexible working and shared office space.

Efficiency Gains

And so, the gains keep stacking up – and that’s before we get to the bane of everyone’s existence: the commute.

Let’s say getting to work takes an hour each way.  That’s two hours a day. Ten hours a week. 520 hours a year.

In an ideal world, labour (i.e. worker bees) would get to “keep” that time – and allocated it to leisure or other endeavors.

In reality, we are more likely than not to spend it working. Nothing like an uncertain economic environment to keep employees on their toes, going the extra mile.

But even if you assume a split down the middle, that’s an extra 260 hours of free labour your employer now benefits from. For a mid-sized company with 1,000 employees, that’s an equivalent of hiring an extra 125 people at 40 hours a week.

Good news for everyone – except airlines, hospitality, commercial property, aerospace, and countless other industries, who are in for a reckoning.

Of course, we’ve been down this path before. Multiple other industries, from passenger shipbuilding to newspaper printing to coal mining, are in various stages of terminal decline. For many, Covid will be the final nail in the coffin.

In the industrial cemetery, there’s plenty of space right next to where the DVDs are buried.

Is the pendulum going to swing back once Covid is finally under control? Sure – but only a little bit. Rest assured that no one is going to want to give up all the efficiency gains.

The Luddites fought a long and hard struggle.  But you cannot fight progress.

Inevitably, productive factors will be re-deployed towards new, more efficient sectors. It will be a painful transition – but one that ultimately gives rise to a new stage of wealth creation.

Calling Winners

At the very beginning of the pandemic, Warren Buffet pressed the big red “SELL” button on his portfolio of airline shares.

You cannot blame him for making the investment in the first place. After a period of consolidation, the sector was in rude shape. Who knew?

Of course, Warren will be okay. His diversified portfolio will see to that.

Anyone who happens to have taken a concentrated bet on specific stocks and industries above?  Not so much.

Active investors should take their cues. If there’s one lesson to be learned from 2020, it’s that no one can predict the future.

Not me or you. Not your brother-in-law. Definitely not that highly paid mutual fund manager with a top MBA.

And not the slick hedge fund manager who happens to have scored a great trade in the past and has never been able to do so again.

Today’s winners will fade out.  The Alphabets and Amazons of today will become the IBMs of tomorrow. Teslas will become GMs. Entire sectors may become extinct.

For all we know, entire countries may enter a period of secular decline. My own strategy of focusing on US equities could backfire in the most spectacular manner if the US financial markets cede the extraordinary advantages they enjoy today.

As ever, the only way to hedge yourself is to diversify. Own the world, ideally in a low-cost way. And hold on for a long time.

Because if there’s one lesson to be taken from 2020 it’s that no one can fight the resilience and the collective progress of the human race. The only way forward is to bet on it.

Happy investing!