Investment in the shadow of coronavirus: How to get lemonade from lemons?

What's the advantage in investing in the stock market?

By ELI GROSS

MARCH 23, 2020 22:14

Updated: FEBRUARY 16, 2021 18:53

Eli Gross. (photo credit: YAAKOV COHEN) — Eli Gross.

(photo credit: YAAKOV COHEN)

The red graphs on the various stock exchange screens around the world have created a sense of panic among investors. Many have been left feeling confused: Should they make a quick exit? Or perhaps it's better to remain calm and patient and wait for the stock market to go back up. Many investors in the stock market put their hard saved money or inheritance into the market in order to increase their capital and take advantage of it in the future, perhaps to purchase an apartment, pay for a wedding for their children, etc. There's no doubt that for "average" investors, those who don't possess large amounts of capital, “playing” in the stock exchange is always a calculated danger, especially today.

It's important to understand that crisis situations naturally shake up the capital markets. The more this uncertainty drags out over a prolonged period of time, these shocks thus cause stock prices to drop. This stems primarily from panic and not from a company's actual value.

There are a few stocks that have increased by dozens of percentage points in the last week. These are stocks in companies that are developing a vaccine, testing kit, crisis management software, or any product that may be required in order to deal with this worldwide pandemic. All of the rest, some more, some less, are dropping.

Therefore, it's wrong to sweepingly say that "this isn't the time to invest." Rather, it's important to examine things in depth and to first understand how the investment market, which is divided into two primary branches – investments in publicly traded companies that are traded on the stock exchange in Israel or any other stock exchange around the world, and investments in private companies and ventures that are not publicly held, works.

What's the advantage in investing in the stock market, meaning, in stocks or bonds of publicly traded companies?

The players in this market are more than a thousand investment institutions including banks and insurance companies, investment houses, family offices, and investment advisors. Investments are made through companies that are engaged in trade, banking, real estate, and various industries. Generally, companies traded on the stock exchange have revenues of millions if not billions of dollars each year, and the market value of each is anywhere from tens of millions to tens of billions.

The primary advantages of investing in publicly traded companies are: Transparency, negotiability, and a known and fair value. The disadvantages, on the other hand, include a long decision making process and high maintenance costs that are likely to significantly harm the company's profits. Therefore, in general, only large companies will choose to be publicly traded. Additionally, it's hard to keep significant trade secrets, which hurts the attractiveness of such companies and finally, the impact of market forces – a publicly traded company's stock price is impacted by considerations that are not necessarily the value of the company, such as the mood of the industry or the state of the market in general. In general, most drops in the stock markets around the world stem from panic and not a true drop in company values. That's exactly what's happening now and what has also happened in previous crises.

Investment in Privately Held Companies

In Israel, there are approximately 300 investment institutions that are active in this market. These include special divisions in commercial banks, insurance companies, and pension funds, investment banks, family offices that manage the wealth of families with significant capital, and many investment advisors. All of these are available to investors wishing to invest in privately held companies that are not traded on the stock exchange.

Because of the fact that these are companies that are not traded on the stock exchange, the investment is considered higher risk. On the other hand, this is a type of investment whose chances of yielding profits are higher. After all, the rule of investing is the higher the risk – the higher the reward.

In most cases, these are small companies that generate profits of anywhere between zero to a few million shekels annually and whose value ranges between millions of dollars and tens of millions. In this market, there are genuine business opportunities because if there's indeed a jump in value, it's likely to be extremely significant. Most of the "exits" we hear about in the press involve privately held companies. In some cases, these are privately held companies that had initial public offerings.

Here as well, as in anything else, there are advantages and disadvantages. The benefits include a significant increase in value, low maintenance costs, (almost) guaranteed secrecy, and change in business model – for example with regard to the novel coronavirus, as in other crises, proving their advantage over large companies whose decision-making process is long and tiresome.

The primary disadvantages of investing in privately held companies are lack of regular reporting, the fact that the market is not determinative, and low negotiability.

The coronavirus crisis that has caused a panic in the investment market has resulted in a rare opportunity for investors to invest in high-quality companies at a particularly attractive price because in the short term, there is a shortage of cash to invest in the market. Additionally, because of the newfound character of the world economy that requires conducting business remotely (online), there is an opportunity to quickly develop into new markets such that growth that would have taken years, will occur in a number of months.

Every sour lemon can be turned into lemonade. Whoever knows how to act properly will be able in doing so now and to leverage this world crisis to his benefit.