Last year was a challenging one for investors all over the world. As the pandemic spread around the globe in February and March, shockwaves rippled through global financial markets.
Central banks acted quickly to flood the financial system with liquidity avoiding a full-blown economic crisis. This deluge of money went on to spark one of the most aggressive market recoveries of all time.
Markets went from being utterly distressed to euphoric in just a few months.
Now, one year on from the crisis, I’ve been looking back to try and see what I can learn from the past 12 months, which was without a doubt one of the most volatile market environments I’ve ever witnessed.
We don’t know what’s around the corner
Looking back over the past 12 months, I can see my biggest mistake was trying to predict the future. I sold stocks I thought would suffer and held on to companies I thought would prosper. I was right about 50% of the time. Some of the companies I sold went on to prosper, while some of the companies I held on to have languished. I didn’t realize what impact the central bank stimulus would have on the market, and I was naive enough to think governments wouldn’t shut down huge sections of their economies.
Consider the opportunity cost
A few weeks after the March market crash, it became apparent which sectors would do well during the pandemic (technology) and which wouldn’t (commercial real estate, brick-and-mortar retailers, and oil). In hindsight, I should have acted quicker to sell holdings in these sectors and reinvest the proceeds elsewhere.
I entered the crisis with the mentality that I wouldn’t be forced into selling any stocks and would wait for at least six months to a year to see how the situation evolved before making any decisions. While this template has worked, my returns would have been stronger had I cut the fat sooner. I spent too much time concentrating on the loss I would take selling the holding and not enough focusing on the opportunity cost of not owning the alternative.
Buy what you know
I know I made some mistakes last year selling stocks when I shouldn’t have done and not buying companies soon enough. One of the root causes of these mistakes, in my opinion, was my ownership of stocks I did not understand completely.
In three cases, I had bought the stocks based on my analysis of their dividend potential. In hindsight, this analysis wasn’t strong enough. These companies cut their distributions at the peak of the crisis, and suddenly, I had no intrinsic value anchor. I was flying blind. I each case, I sold the companies to buy something I had a better understanding of and where my estimate of value is based on something more than a single stream of shareholder returns.
I made mistakes in 2020. Some were costly. Some not so much. One thing I don’t want to do is compound these mistakes. Rather than trying to make the money back quickly and potentially exposing myself to more risk and losses, I doubled down on what I knew.
I’m well aware that mistakes will happen in investing. Even the best investors, such as Warren Buffett, make mistakes from time to time. The best course of action is to appreciate the error, understand why it happened and move on. Getting angry or trying to take revenge can only lead to a worse result.
Investing is hard
The biggest lesson I learned in 2020 was that investing is hard. Trying to time the market and pick winners is terrifically difficult. I don’t think there’s any formula or set process one can use to eliminate all the risks involved.
On that basis, if there’s one thing 2020 taught me, it is that I should be prepared for anything and stick with what I know rather than overstretching myself. It also taught me that I don’t know what the future holds for markets. Therefore, holding some assets in an index fund makes sense.
Finally, if I’d had more cash on hand at the beginning of the crisis, I would have been able to take advantage of high-quality opportunities when they presented themselves, rather than being tied into old holdings.