I recently looked back at my experience over the past year as an investor and the trades I made throughout the pandemic. When the market selloff started toward the end of February and the beginning of March last year, I made the conscious decision not to be forced into making any knee-jerk trades.
As I noted in my previous discussion, for the most part, I adhered to this ambition. Still, I wanted to spend some time analyzing whether this was the right decision or whether it would have been more sensible to take some losses and reinvest the money in higher-growth businesses.
Opportunity cost
From an entirely objective perspective, I think the answer to this question is undoubtedly yes. I chose to remain invested in many old-world stocks, such as Wells Fargo & Co. (WFC, Financial) (which I have recently sold), when I could have earned better returns by investing in faster-growth options. That was a mistake.
I mistakenly held another two investments for far too long, Royal Dutch Shell PLC (RDS.B, Financial) and Imperial Brands PLC (IMBBY, Financial). I have now sold both holdings.
In trying to understand why I made these mistakes, I've been reviewing why I bought these businesses in the first place.
With Shell, I can quite honestly say I did not understand the business. I bought it based on the company's dividend reputation. So when the company cut its dividend in the middle of last year, I had nothing to go on. That cut, and my inability to understand the remainder of the business, lead to my decision to eliminate the holding.
With Imperial, it was a little different. I understood the company and its product. It was and remains a cash cow. However, I also understood this was not a growth business. The company is essentially an annuity. All of the cash generated from operations is being returned to investors as the business shrinks. With a dividend yield of 9.6% at the time of writing, this could work as an investment strategy if the dividend is paid in perpetuity, but that seems unlikely.
Based on this analysis, I decided to sell the stock and move on.
At this point, I should note that in my previous discussion I did not highlight these trades because they were not entirely driven by the pandemic. I decided to sell these holdings because I could find better opportunities elsewhere. The holdings I highlighted in my previous article I sold because of the pandemic. I've split the assets sales into two different buckets because I believe it's essential to evaluate why certain decisions were made honestly.
That brings me onto Wells Fargo, which, as I noted above, I also sold recently. This was an opportunity cost sale. I sold the holding toward the end of last year when it became clear that while the bank's outlook was improving, its problems were deeper than expected. I had to revalue my investment case for the business. I now think it will take much longer for the firm to return to its pre-scandal performance levels.
Wells was one of a handful of other stocks I sold toward the end of last year when I realized I'd made a mistake not shifting my funds into better opportunities at the height of the pandemic.
The bottom line
Last year was a learning opportunity for many investors, including myself. My biggest takeaway was to double down on the companies I know and understand and don't try to force an investment case with companies I don't understand. I also realized how important it is to know where the growth is coming from, rather than relying on reversion to the mean.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Looking Back Over a Year of Crisis: Reviewing Trades
- Berkshire Hathaway Energy: A 'Jewel' in Warren Buffett's Empire
- Warren Buffett and GEICO: A Success After Near Total Failure
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