I think we can all agree that 2020 was a year unlike any that we experienced before. I am not going to spend time today to recap all that has occurred. Honestly, the emotions are still too raw to fully understand all the implications. And, we don’t have sufficient hindsight to interpret the impact of a year for the ages.
What I do want to share with you is a conversation that I recently had with a VERY smart gentleman that I have had the pleasure to work with for a large chunk of my career. When we re-connected last month, we spent time reflecting on the past year. The conversation pivoted quickly from reminiscing about 2020 to exploring opportunity in 2021 and beyond. For the next 40 minutes, I listened to my friend talk about 2 intertwined topics – the importance of diversification and necessity to seize opportunity when it arises. Allow me to share a summary of our conversation.
Diversification
In way of background, I consider this friend to be a very savvy investor. He digs into potential opportunities, asks the right questions, and makes sound investment decisions. We talked in detail about how his existing investment portfolio – public equities, real estate and plenty of private businesses fared last year. And, it was a wide range of performance.
Like many of us, his public stock portfolio was pummeled in March and April was surged as the year advanced and we came to grips with how to continue moving forward during a pandemic.
His commercial real estate portfolio was hit VERY hard as tenants stopped paying rent, some to conserve cash others because they simply closed the doors permanently.
But the bright spot was among the private businesses in which he is an owner. Many of these businesses were in segments that thrived last year – cleaning services, IT, and home remodeling.
His takeaway from 2020 was thankfulness. He was thankful that he did not have all his eggs in one basket. One element of his success last year was the diversification of his investments across many investment categories that limited the negative impact of performance is a single bucket.
Opportunity
The more interesting part of the conversation was the forward-looking piece. From mid-April forward, this friend (like many other successful business owners I know) started to look for investment opportunities. He saw the slippage in asset values among some small businesses that had good futures but were simply liquidity constrained. He saw some commercial properties that were currently struggling but had strong long-term prospects.
And, he bought assets. He invested in businesses. He doubled down!
In midst of a pandemic, with massive uncertainty all around, he invested in assets that he felt would be productive, long-term pieces of his portfolio! He did not see risk. Instead, he saw opportunity and he pounced on it and paved the way for years of income and growth for his portfolio.
My Takeaways
This a powerful combination of investment strategies.
First, it is essential to diversify our investments to spread risk and create opportunities from multiple avenues. This is an area that continues to evolve in our house. I am always looking for new businesses, real estate and investments that create upside while spreading risk.
Second, using the contrarian investment philosophy and buying on the market dips has been a proven strategy forever. Seeing it done during this pandemic was a reminder to me of the long-term value it can produce for a portfolio.
I hope that you take these lessons and determine how you can deploy them to improve your investments.
