The COVID-19 pandemic was unprecedented, and so were stock markets during those tumultuous years. They acted in strange and unusual ways during the height of the pandemic. Investors saw struggling, out-of-favour stocks, including theatre operator AMC Entertainment Holdings Inc. and video game retailer GameStop Corp. , suddenly surge after Reddit posters promoted them, and pandemic-fuelled stocks, including online videoconference operator Zoom Video Communications Inc. and home gym sensation Peleton Interactive Inc., rose far beyond sustainable levels.
Now those stocks have tanked from the highs they reached in 2021 and they have given investors a raft of core lessons about how not to invest. Here’s some advice from experts about those key investing lessons every investor needs to learn again and again.
Focus on the fundamentals, not FOMO
Ida Khajadourian, a portfolio manager and investment advisor with Richardson Wealth in Toronto, says if a stock catches your interest, you need to do your homework before you buy – even if everyone is talking about it now.
Chasing performance and being led by the “fear of missing out,” known as FOMO, isn’t the right way to invest for the long term, she advises. And if you get caught up in those emotions, it’s best to work with an advisor and ensure you’re following a solid, long-term investment plan.
“There are lots of lessons there. I guess it depends on where you get caught in the rise and fall (of a hot stock),” she says. “If you’re on the side of the rise, it’s only good if you sell and take profits. And if you’re on the fall, then you probably didn’t do your homework.”
You need to temper your excitement and look at the company objectively, she adds.
“The lessons are that price matters, and intrinsic value matters. So, focusing on the fundamentals of a company such as earnings, revenue growth, competitive positioning, things like that matter,” she says. “Usually what goes up like that – in a mania – (doesn’t go) straight up forever.”
Being a disciplined investor is important, she says, and you need to be regularly evaluating your holdings to see if they’re meeting your financial goals.
“Usually, manias come with crazy growth rates that are likely not sustainable,” she explains. “So, it’s important to evaluate the long-term sustainability of a company’s business model and understand what the future might look like.”
Dan Hallett, vice-president of research and a principal with HighView Financial Group, says that every investor can learn from the events we saw during the pandemic.
“These are lessons that it feels like every generation of investors has to learn,” he says. “In a way, it is the same lesson being learned with a bit of a different backdrop, and the higher-level themes are the same.”
He likens the pandemic investing craze to what occurred during the dot-com boom of the early 2000s when any company doing business on the internet received massive valuations even though they had little to no profits or track record.
“(Investors) don’t take the time, or they don’t understand how to take the story and put it in the context of what you’re paying for that story,” he explains. “I’m not going to pay a Cadillac price for a Chevy Cruze… there’s context of what things are worth.”
“But when it comes to investing, people get seduced by the story, and they just think everything’s going to the moon. They don’t understand … what kind of expectations are embedded in the price.”
Be an investing skeptic
Hallett says that investors who are more cynical are less likely to get caught up in these outrageous investing frenzies.
It’s better “to step back and try to look at things objectively,” he advises. “It’s just a hard thing to do, especially when you’re excited.”
That’s what happened with Zoom and Peleton, which saw a sudden surge in revenues as lockdowns meant people had to work from home and needed a more sophisticated video conferencing tool, and gyms were closed and Peleton stepped in to fill that void with their online classes and sleek and high-tech treadmills, rowing machines and stationary bicycles.
“One of the big mistakes people made was that they looked at the big jump in revenues (for those companies) and thought ‘it’s just going to keep going,’” he explains. But the pandemic was “an accelerant” and “it was pulling forward a whole lot of future sales.”
As an investor, you need to think through some potential future scenarios to see if what’s going on makes sense, and if it might last, Hallett says.
“You have to walk through, honestly and realistically, what that looks like, and it’s hard to do, because if you’re excited about the big sales growth that you saw in some of those stocks, running through those scenarios might take the air out of your sails, and so you become less excited. Now you’ve got to go find something else,” he explains.
“It is rare that a really good sound investment is something that’s going to seem really exciting,” he says. “Even less likely that it’s going to be a hot theme of the day.”
Know the difference between investing vs. gambling
During the pandemic, easy-to-use online trading platforms made it simple for any investor to execute a trade with a flick of their fingers on their smartphone, and that can be dangerous, especially when driven by emotion or the fear of missing out, says Khajadourian.
“I saw people who had never bought a stock in their life opening trading accounts and throwing hard earned money at companies that they might have never researched or understood,” she says. And with TikTok and Reddit posters recommending stocks, even if they weren’t experts, many investors who were bored and stuck at home found online investing too tempting to ignore.
“Diversification is always a key principle of risk management and not being concentrated in any one stock or sector,” is vital to your overall investing success, she adds. “It’s great when (a hot stock) is good, but again, it comes down to, is it sustainable?”
If you want to do some speculative investing, just ensure it’s only a small percentage of your portfolio – and it’s money you can afford to lose, she adds.
Hallett says investors need to be educated about how to best approach investing for their long-term benefit. “There’s a gambling mentality and if people really like the gamble, the speculation, I don’t know how or if they can be convinced otherwise. I’m sure some can but some just love the thrill of chasing a win,” he says.
Online trading apps can be problematic, he adds. “They encourage you to trade and make it so easy,” he explains. “It’s more like a game.”
When you’re investing in a ‘hot’ investing theme you’re really hoping you’ve bought the stock at the right time, he says.
“Whether you can succeed or not with one of these themes – and I would really call them … speculation – it really becomes luck in timing. If you’re jumping on a speculative theme really early maybe you have a better chance of catching some of the early waves, but again that’s more akin to gambling than investing. That’s fine, just recognize it for what it is.”