5 Painful Lessons From COVID-19 Stock Market Crash (Retail Investor’s Mistake)
Covid-19 has been a tough time for many people. This includes the stock market, which has taken a dive within the first few weeks of the COVID-19 pandemic.
I have been investing for more than a decade of my life and have seemed a few black swan events during my journey of investing. Little did I know there is still much for me to learn when investing in stocks.
Here are the 5 lessons I’ve learned from the COVID-19 market crash in 2020.
1. MOAT Of A Company Is More Important Than You Think
MOAT of the company is the most important thing we need to determine before buying any stocks.
Not just looking for a strong MOAT, but an unbeatable MOAT.
When the market is good, it is easy for us to identify companies with a strong MOAT.
- Is it having a monopoly in the industry?
- Is it the leader of the industry?
- Is it a well-known brand that everyone in the industry knows about?
If it is a yes to all these questions above, it is highly likely to have a strong MOAT.
But what do I mean by a strong unbeatable MOAT?
Here are some examples to illustrate what I am saying.
- For the search engines, Google is the stock I should be looking at. Not Yahoo, not MSN, not BING, not Yandex, not Swisscows, not DuckDuckGo, etc.
- For e-commerce, Amazon is the stock I should be looking at. Not eBay, not Walmart, not Etsy, not Lazada, not Shoppe, not JD.com, etc.
Don’t look for unicorns and don’t expect yourself to be smart enough to find a unicorn just because you know a thing or two about investing.
“When investing, invest in only the biggest, largest, and most renowned companies.”
Look for opportunity in these biggest stocks (biggest and not just big) in the industry, and not the 2nd or the 3rd best option.
My lesson learned on investing during this market crash.
“Don’t go for average or good MOAT, go for companies with the very BEST MOAT.”
Antony C.
2. Numbers Don’t Lie But Don’t Buy Only On Numbers
During the market crash, I was crunching the numbers of hundreds of companies looking to find a unicorn in the mist. I was looking for companies that fit one or more of these few criteria.
- Good ROE
- Good EPS growth rate
- Good Equity growth rate
- Good D/E ratio
- Good P/B ratio
In the process, I found a few companies with great fundamentals,
- These are small-cap companies that might become a unicorn in the future.
- These are small-cap companies with great financials.
- These are small-cap companies that no one knows of.
With just the numbers, these are great companies indeed.
But there is a small issue.
They don’t have very good MOAT.
They are not the best in the industry, not even the 10th best in the industry.
When a company doesn’t have a good MOAT, the risk is high, and might not be a good company for the long-term investor who aims to hold a great company forever.
My lesson learned on investing for this market crash.
The MOAT of a company is sometimes more important than the numbers.”Antony C.
3. Market Crash Can Recover Faster Than You Can React
In the year 2020, the S&P 500 is at a high of 3380 (09 Feb 2020), and in just 5 weeks, S&P 500 falls to the bottom of 2304 (15 March 2020).
During the height of the market crash, approx 2 weeks into the market crash, I brought a great company at a really great price.
At that point in time, the stock has already fallen 50% of its value.
According to my calculation, it is a dirt cheap price for an excellent stock.
But like all humans, we are greedy.
I fear it will fall even more and I will lose out on the potential gain.
Greed came into me and tell me to wait for the stock to crash even more before I should buy more.
I was thinking… “I should probably wait, knowing the historical data, a stock market crash can last for a few months. Waiting for it to crash further won’t be too bad of an idea right?”
I was wrong.
In the next week, the stock rebounded 10% and 30% then back to almost pre-market crash. (During that time there is no hint of a market recovery.)
That is when I finally understand a simple but important lesson about investing.
“Market can be irrational at times, but a market recovery can be as sudden as it crashes. And if a great stock is beaten down to an irrational level. The recovery of a great stock can be fast and furious.”
During the market crash, it is often the average stock that takes a few months to recover from a crash, but not a great stock.
My lesson learned on investing for this market crash.
“When you see a great stock at a great price, it is time to buy and not the time to wait.”
Antony C.
4. Better To Hold a Few Great Stocks Than A Bucket Of Good Stocks.
It is better to own the best stock than a few good stocks.
I remembered a famous saying,
“Diversification is a protection against ignorance.”
Warren Buffet
When you know what you are doing, and have the amplitude to know what is a good stock from a bad one, a great stock from a good one, it is better to choose one or two winners, than a dozen of runner-ups.
We only have the time to get a deep understanding of a maximum of 10 stocks, any number of stocks above 10, we won’t be able to understand them well enough to make a good decision.
There aren’t many companies with great MOAT, but there are many companies with good MOAT.
When buying a stock, buy one with a great MOAT, not a few dozen with a good MOAT.
My lesson learned on investing for this market crash.
“Buy the best stock and ignore the runner-ups. The runner-ups are only there to misguide you, especially during a market crash.”
Antony C.
5. Evaluate The MOAT Of The Stock Before The Market Crash, You Can Be Less Logical Than You Think
No matter how logical we think we are, we humans are illogical creatures, including me and most of my readers.
Most investors like us know the 2 important concepts of investing.
- We know to be greedy when others are fearful.
- We know to be fearful when others are greedy.
But when the market crashes, companies that we think are great companies sink like a stone, while companies that we think are average companies seem not to be affected.
“Mr. Market is not always rational.”
But, because of this irrationality,
- We doubt our assessment and we do the opposite of what we are taught.
- We miss a great opportunity to buy a great stock at a fire sale price.
- We let our focus get misguided and look at the average company wondering if they are actually good.
A market crash is like a smoke bomb that confuses our senses and makes us wander around aimlessly while we miss our golden opportunity to buy a great stock that we have been waiting for.
My lesson learned on investing for this market crash.
“Find excellent companies with great MOAT before a market crash, and stick to these companies.”
Antony C.
Closing thought
These are some lessons I have learned during this recent market crash.
Lessons that I only discovered after the crash.
“Only when the tide goes out do you discover who’s been swimming naked.”
Warren Buffett
What are the lessons you’ve learned during this crash?
What are the things you want to tell your future self so you won’t repeat the same mistake?
Let us know in the comments below or get chatting in our forum now!
Read Also:
- How to Invest During a Recession For Investors (Best Investment)
- 5 Things To Do During Stock Market Crash in 2024 (Now & Then)
- How to Deal With Losses In the Stock Market? (4 Types of Stock Market Losses)
- 7 Top Characteristics of Defensive Stocks That Protects You From Market Crash
- 5 Warning Signs Of Stock Market Crash For 2024 & Beyond
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Antony C. is a dividend investor with over 15+ years of investing experience. He’s also the book author of “Start Small, Dream Big“, certified PMP® holder and founder of IncomeBuddies.com (IB). At IB, he share his personal journey and expertise on growing passive income through dividend investing and building online business. Antony has been featured in global news outlet including Yahoo Finance, Nasdaq and Non Fiction Author Association (NFAA).
