Last year served up many opportunities to make mistakes. And, boy, did I take generous portions. You can kick yourself for your mistakes, or you can learn from them. I did a bit of both.
Since “mistakes are our best teachers,” here are four lessons learned from my biggest 2020 blunders, which may help you become a better investor.
Lesson #1: Never let a few good calls make you think you are a genius
By far my biggest blunder was being way too complacent about Covid-19 early on. In a Jan. 28 column, I wrote that investor fears about the virus were overblown. That was dumb. It turns out, they were just getting started.
I suggested buying stocks that would go on to get hit the hardest, like Royal Caribbean Cruises
Las Vegas Sands
and Yum China Holdings
In my defense, at least I was in good company. Many medical experts, market strategists (including at Goldman Sachs and Wells Fargo), and public health-care officials downplayed the threat of the virus early on, including Dr. Anthony Fauci. But if that’s all I said about this blunder, it would be a cop out. I decide what goes in my column.
How was I so complacent about my take on Covid-19? My overconfidence stemmed from my previous calls on potential epidemics. When Ebola, SARS and swine flu rattled markets over the past two decades, I studied them and concluded the market was overreacting. In each case I was right. Like some lab rat, I got trained to think I’d be rewarded for being complacent on Covid-19, too.
I’m not sure how I would have made a better assessment of the Covid-19 risks early on. There were so many cross currents of information from experts. But that doesn’t matter. I could have chosen to take a wait-and-see approach. Taking a little money off the table proved to be the right decision. Always remember it’s OK to say “I don’t know.” You don’t have to have an opinion about everything.
In contrast, I doubled down. In a Feb. 28 column, I wrote that Covid-19 would not lead to a recession. Again, I was in good company, citing the opinion of T. Rowe Price bond guru Mark Vaselkiv. But my bad. I let that in my column.
In between, in a Feb. 5 column I was also bullish. At least that time I stated precious metals mining stocks would advance as central banks flooded the system with easy money to help fix the crisis. This turned out to be right, but only half so. The Global X Silver Miners exchange traded fund
from that column are now up 60% to 129% from Feb. 5. The iShares MSCI Chile ETF
and iShares MSCI Brazil ETF
are still underwater.
Key takeaways: Don’t be too cavalier about risks. Don’t overestimate how much you know. Don’t assume that just because you made a good call in the past, it gives you special powers to do the same again. Overconfidence is an enemy of investors. People often assume they know more than they do, and I am no exception. We all need to stay humble in the markets, because overconfidence can do you in.
Lesson #2: Be calm, not early
Throughout my investment career, I’ve had a habit of “being early,” or acting too soon to buy shares in beaten-down companies or markets. I am getting better. But I haven’t fully exorcised the “too early” jinx just yet. I think a lot of investors make this mistake. We get too caught up in following the news flow in the moment.
For example, I know full well that insiders tend to be early when they buy, since I track them every day for my stock letter Brush Up on Stocks (see the link below). Nevertheless, I overlooked this lesson when I wrote a bullish March 3 column based on the tone of insider buying. The S&P 500 would go on to fall another 23% by March 23.
Key takeaway: You don’t have to rush in to every trade. In a March 6 column a few days later, Firsthand Technology Opportunities Fund
manager Kevin Landis disagreed with the insiders. He cautioned there was room for more panic. He got that right.
Lesson #3: Be wary of the crowd
Contrarians love to follow the media for signs of market extremes. They track media sentiment, especially the magazine-cover indicator. According to this gauge, when a magazine runs a bullish cover story, it is time to get out. Likewise, buy when covers or screaming headlines on websites are bearish.
This does not mean journalists are dumb. They’re just good at what they do, which is determining what people want to read about. As much as I know all this and try to be a contrarian, I get drawn into the frenzy of the moment too.
In a July 31 column I made this mistake when I wrote bullishly about gold. Gold did go on to rise another 5%. But then it reversed and fell 10% from where I suggested it. I was bullish just ahead of a correction. It’s no excuse that I was citing an outperforming gold fund manager.
Gold has recovered since, trading almost back up to where I suggested it. But now I’m personally more cautious on gold because of the risk that the economy and interest rates will heat up in 2021 and Covid-19 fears will ease. You can see those views in this column.
Key takeaways: In investing, crowds should make
Lesson #4: But don’t write off the power of the herd
In March, the vaccine craze started heating up. I took the conservative path and suggested investors should avoid this game. Citing a biotech expert in this column, I reasoned it’s too hard to predict winners. And biotech companies would be reluctant to make huge profits from Covid-19, anyway. It would be terrible PR.
What a bad call. I really underestimated the power of vaccine trading fever, and the stampede of investors into these names. Anyone who listened to me missed out on a 500% move in Moderna
It is still up over 280%. They also missed the 300% move in Inovio Pharmaceuticals
It is still up a respectable 24%. Regeneron Pharmaceuticals
advanced 35% and now it is about flat. Gilead
from that column, has fallen 23% since then.
At least I was bullish on Tesla ahead of a 460% move in this April 4, 2019, column. That’s the gain through my cautious call July 15, 2020. But missing out on a double is not good.
Key takeaways: Consensus sentiment and “crowded
trades” are not all bad. The crowd isn’t always wrong. And the power of the
herd can persist for longer than you think. Sometimes you need to just keep
riding the wave.
But how do you balance this lesson with the one about
being wary of crowds? That remains one of the big mysteries of investing. If
you figure it out, let me know. Ultimately, there’s probably no answer.
For me, the solution is to be content with the big gains you get, even if you don’t sell at the top. Only one trader ever gets so lucky. And don’t let envy and regret eat away at you when you miss trades, which is inevitable. It will only cloud your judgment. Envy and regret are emotions, and emotions are also the enemy of investors.
Michael Brush is a columnist for MarketWatch. Brush has suggested RCL, SBUX, DIS, H, FCX, GILD, INO and TSLA in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.