Angel investing during a pandemic: There’s a fine line between courage and recklessness

To understand the relationship between the economy and the market, think of a guy walking a dog in a park. The dog and the guy are going to get to the same place in the end, but while the guy is just strolling along, the dog is hyperkinetic — running around his legs, trying to chase a ball, getting distracted by squirrels, and so on.

In the COVID-19 era, the story is much the same — except instead of a gentle stroll in the park, the man and his dog are picking their way along a cliffside path, and instead of a single dog the man is walking a pack of puppies of all shapes and sizes. There’s no avoiding the fact that at least some of those puppies are going over the edge — and there’s also a decent chance that the man will fall off the cliff, too, and drag everyone down with him.

The irony, of course, is that it’s during uncertain times that brave investors can reap the biggest rewards. Back in 2008, Warren Buffett declared that his guiding principle was “Be fearful when others are greedy, and be greedy when others are fearful.” Now, as then, everyone is fearful — so what’s the best strategy for angel investors who want to engage in a little constructive greediness without losing their shirts?

1. Understand the risks.

If we get a vaccine quickly, we could wind up emerging from this crisis in fine shape, and both the economy and the market will boom accordingly. But if we have to hang on for herd immunity — or, worse, if no such immunity is possible, then we could face a much longer struggle that will send many businesses into bankruptcy. Make sure your investment strategy doesn’t leave you overly exposed in a worst-case scenario, and doesn’t leave too much money on the table if things go well.

2. Build a fortress.

Every investment strategy should start with building a “fortress of solitude” — the basic assets and secure investments you need to take care of yourself and your loved ones in perpetuity. It’s fine to roll the dice once you’ve got your nest egg in place, but don’t gamble away your kids’ future based on your intuition about how the COVID-19 pandemic will play out.

3. Don’t take bargains at face value.

In recent months I’ve seen companies that had originally sought Series A funding at a $10 million valuation begin to accept investments based on valuations of just half that amount — potentially a real bargain, right? Well, absolutely. But cut-priced investments call for an extra round of due diligence. After all, if a startup’s chance of success has slumped from 50% to 5% due to changing market conditions, then that half-price offer might not be such a good deal.

4. Don’t count on “safe” investments.

Real estate might not shed value as quickly as your stock portfolio, but that doesn’t mean it’s insulated from the COVID crisis — just that the effects will take longer to shake out. Investments in strip malls and commercial spaces could prove disastrous in the long run, for instance, while apartment values might hold up significantly better once the initial economic jitters pass. Make sure you’re assessing risk clearly based on underlying assets, and not assuming that any particular class of investments are inherently safe.

5. Look for startups to drive future growth.

Big companies have the reserves to weather a downturn, but smaller outfits are more vulnerable. With VCs getting nervous, we’ll see some undercapitalized startups running out of runway before getting airborne. Those that survive, though, will drive the upturn as the economy recovers, because they’ll have the energy needed to capitalize on new opportunities. Don’t be afraid to invest in startups, but make sure you only back companies that have both the discipline to stay lean, and the agility to grow quickly when things improve.

6. Buy money savers, not money makers.

During bear markets, the companies that promise to save people money have a built-in advantage over companies that promise to deliver new value and make huge profits along the way. Smart startups are already pivoting into money-saving rather than money-making spaces — and that kind of flexibility and market savvy can be a proxy for other indicators that a company has what it takes to survive and thrive, too.

Striking a balance

It’s easy to forget that when Buffett urged investors to dive back into the market in 2008, nobody really knew how bad things were going to get. It takes courage to invest during a downturn, in part because the distinction between courage and recklessness only really becomes clear with hindsight.

The key, now as always, is to strike a balance between greed and fear. Invest conservatively with money you can’t afford to lose, and gamble intelligently with what’s left. Get that balance right, and you can ensure your investment portfolio is structured in such a way that you won’t lose your shirt if things get truly awful — but also that you don’t play things so safe that you get left behind when the recovery comes.