Lessons Learned from the Covid Rollercoaster

The Covid-19 crisis chapter of stock market history has come to a close. Unfortunately, its end is pretty clearly marked by a fresh new crisis. This one also means suffering for millions of people, but is even sadder than the last, having been brought about by intentional human actions rather than the random mutations of a virus. I don't yet have anything novel or intelligent to say about the Russian invasion of Ukraine. But during the Covid crash, subsequent boom, and final pendulum swing back to something like normal valuations, I did learn a few things.

Diversify your portfolio, not your trades

In the early days of the pandemic, just after the first big US stimulus bill had passed, I was pretty sure that lower-end consumer lenders (Capital One, Ally Financial, Synchrony Financial) were a great opportunity. Their stocks were way down, as you’d expect for this industry at the onset of any recession, but the market hadn’t yet priced in the fact that the US government was about to start writing people checks on a level never before seen.

I bought some of these stocks; they went up a lot. I also bought a bunch of other left-for-dead value trash, for the sake of diversification, even though I had a lot more conviction in the lenders idea than, say, Levi Strauss and Co. The other value trash went up too, but I’d have been much better off just focusing on my best idea, the low-end lenders.

Here’s the thing: I was never at risk of being too concentrated, even if I’d poured every new investable dollar into COF, ALLY, and SYF for the full course of 2020. I still had plenty of long-term holdings in totally different sectors to balance things out. I was diversifying my best idea of March 2020 with my 2nd-best idea of March 2020, and 3rd, and so on; I should have just let my best idea from March 2020 be naturally diversified against my best idea of August 2020, my best idea for January 2021, etc...

Mind the company your companies are keeping

(aka avoid not only the obvious retail garbage, but also anything adjacent to the obvious retail garbage)

During the brief but intense lockdown-boredom-free-gov't-money stock market boom, I wisely shunned Zoom, Peloton, all pre-revenue electric vehicle companies, and anything associated with Chamath Palihapitiya. However, I did buy shares in some other high-growth technology companies, at more reasonable valuations (e.g. SQ, ROKU, STNE), which unfortunately turned out to be pretty highly correlated with that nonsense. This wasn't impossible to predict in advance: these stocks had both narrative and lots of shareholders in common with the new sparkly stuff that I correctly identified as fool's gold. I'm still holding each of SQ, ROKU, and STNE, and like their long-term prospects, but could have gotten them at far better prices had I waited for the excitement to pass.

Maybe if all the dumbasses are buying tech stocks, it's best to avoid tech stocks for a while, even if my favorite tech stocks are different from the dumbasses' favorites.

The market doesn’t care about your personal history with a stock, and neither should you

I bought shares in Pinterest and Stitch Fix as speculative short-term investments in early 2020. Both skyrocketed as “Covid winners” (and in the case of Stitch Fix, also a short squeeze). I had sold fully out of both by early 2021, using the quick profits to fund other investments. Then as both started to come down over the course of 2021, I bought back in, thinking “if I sold at 60, then get back in at 40, I’ve kept my position and made some free money along the way!” I had managed to forget that I sold at 60 because I thought these were grossly overvalued, at least relative to other opportunities. Both were in fact falling knives that I would never have attempted to catch had I not just pulled off the rare feat of selling at the top.

If you see a $5 bill on the ground, pick it up and move on with your day; don't keep coming back to the same spot expecting to find another.