Around 12 months ago, the coronavirus pandemic was just getting started. Uncertainty prevailed, and this was reflected in the financial markets. The S&P 500 started selling off in the last week of February, and by March 22, the index had plunged nearly 40%.
At the time, I clearly remember thinking I wasn't going to make any significant changes to my portfolio. I wanted to sit tight and see how the crisis developed over the next year before making any knee-jerk trades.
For the most part, I stuck to this ambition. I've only made a handful of trades. As part of my ambition to continually learn, develop and improve my investment strategy, I have recently been reviewing these deals to see what I can learn from the trades 12 months on.
Too much debt
One of the first crisis trades I placed was selling a small holding in GrafTech International Ltd.. (EAF, Financial). While I had initially committed to holding on to this position, I became concerned about the company's high level of borrowing heading into an environment where virtually the entire economy was shut down.
I sold this position at a 30% loss. Today the stock is up 100% from my selling level and around a third from the original acquisition price. If I had held on, I would have been able to recoup my initial investment.
However, I reinvested the funds in what I believed to be a better opportunity. The decision to sell a weak stock and take a loss to then reinvest the capital arguably turned out to be the right decision.
The other position I sold pretty soon after the crisis began was Anheuser-Busch InBev SA (BUD, Financial). This was a very similar scenario. I became worried about the level of debt that the company had in a hostile economic environment. I took a loss, but the money was reinvested in a company trading at a much more attractive valuation, which turned out to be the right decision.
Looking back, I can see that Graftech and InBev both went against one of my top five rules of investing: don't buy companies with lots of debt. In both cases, I believed the companies looked cheap at the time of acquisition and could create value by paying down borrowing. They were making progress until the macro environment took a turn for the worse and bankruptcy became a distinct possibility. That's the problem with debt - it removes options in times of stress, and we don't know when the economy will turn.
Travel sector investments
I also dumped Carnival Corp. (CCL, Financial). Buying this was a colossal mistake, although not one I could have forseen. I originally acquired the cruise line operator as a growth play. Its balance sheet was relatively healthy, and it looked as if the cruise industry would see years of steady growth. Of all the operators, Carnival seemed to have the best capital allocation policy and profit margins.
Looking back at my notes, I believed the pandemic would be nothing more than a few months of disruption, and with that belief, I was adding to my position in the stock toward the end of February and beginning of March last year.
More by luck than anything else, these purchases helped me recover some of my losses when I sold in June. The sudden market rally that lifted cruise lines, airlines and other recovery stocks allowed me to exit at a reduced loss.
Nearly a year on, it seems that this was the correct decision. After a year of no revenue, Carnival is a shell of its former self. It may take years for the company to recover.
The pandemic also inspired me to remove a long-standing holding from my U.K. portfolio, Safestay PLC (LSE:SSTY, Financial). I have owned the stock since 2015, and it looked as if 2020 was finally going to be the year it broke into profit after years of building an established hostel brand throughout Europe. The pandemic closed all of its hostel venues, and I believe it has set the business back years.
Another small position, but the capital could be better deployed elsewhere. In reality, I should have sold this holding much earlier. The opportunity cost has been far worse than the loss incurred from the sale.
Disclosure: The author owns no stocks mentioned.
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