Investing Lessons I’ve learned from COVID-19

At the beginning of this year, Mrs. T and I looked at our dividend income history and came up with a very challenging and ambitious goal for this year. We believed by saving money every month and investing that money, combined with organic dividend growth and reinvesting dividends, we may have a chance to receive over $30,000 in dividend income in 2020. So we set this challenging goal for ourselves and purchased many dividend paying stocks throughout January and February. Things were looking promising, and we thought we were making good strides toward this goal of ours.

As COVID-19 started to spread outside of China, originally I was naive and didn’t think anything would happen. I did not think about the potential devastating economic impact the virus would cause on a global scale. I thought the stock market would continue to chug along and that the buy and hold strategy would work just fine. 

Then the virus started to spread globally and the stock market sell offs started. Although we only invest with money that we don’t need in the next 5 years or so, it was still hard to see the value of our dividend portfolio dropping by close to $250,000. While the stock market has recovered from the March lows, companies have started to hold on tight to their cash reserves. Some companies have even started announcing dividend cuts or suspensions. 

As an investor, the last couple of months sure has been quite a ride…

Investing Lessons I’ve learned from COVID-19

My DIY investing experience has spanned over 15 years but everyday I find myself learning new things. The COVID-19 pandemic is the latest event that has provided valuable learning experience for me. Here are some investing lessons I’ve learned from the COVID-19 pandemic so far.

Stop chasing yield and taking on more risk

I will be the first one to admit that one of the mistakes I have made this year is focusing too much on the $30,000 dividend income goal. By focusing too much on the end result, I began to look at higher yield dividend stocks and taking on more risks than necessary. For example, while I knew Inter Pipeline had some debt issues and was facing some headwinds with the Heartland Petrochemical Complex Project, I ignored the potential warning signs, convinced myself the high yield was sustainable, and purchased 450 shares of Inter Pipeline in early January. When the crude oil price started dropping like stones in water and the entire oil & gas sector started to crumble, it became obvious that Inter Pipeline’s only solution to improve its financial outlook was to reduce its dividend payout significantly. 

So the 72% dividend reduction by Inter Pipeline didn’t come as a surprise to me but it did hurt us by reducing our annual dividend income by over $1,000.

Similarly, I took a calculated risk by purchasing 51 shares of Suncor in mid March at around $19 because the yield was north of 8% and I thought the dividend was safe. Although the stock price has appreciated since my purchase, Suncor announced a 54.8% dividend reduction.  

Sure, I couldn’t have predicted the devastation the pandemic would have caused the stock market back in January or February, but I should have ignored the dividend yields and focused on the company’s balance sheet and paid more attention to my dividend score card. Looking back, it would have been a better play to invest in a low yield stock like Costco or Procter & Gamble instead of buying Inter Pipeline and Suncor. 

Lesson learned. 

Go with my gut feelings

After spending over 145 hours in the air in 2019, I became a big fan of Delta Air Lines—so much, that I started to seriously consider purchasing Delta stocks. Delta’s financials looked good and the company had increased dividends for seven straight years at an impressive five year annualized dividend growth rate of 61.3%. Not to mention, the great Warren Buffett had been taking up major stacks in airline stocks, including Delta Air Lines.

However, after my encounters with two airline stocks, I developed a sense of uneasiness with the idea of investing in airline stocks…

Many years ago, when I first started with dividend investing, I invested in Chorus Aviation Inc because of the high dividend yield. Once I learned more about how to read quarterly and annual reports, I realized that the business model didn’t make much sense and the dividends were not sustainable. I eventually sold Chorus Aviation stocks at a small loss. A few years later, I invested in WestJet stock. As I pointed out in my original investment analysis on the risks for WestJet:

“The airline business is very cyclical. People tend to fly more when the economy is doing well. When the economy is bad, people will usually cut their vacation budget first. This is the same thing for businesses as well. Furthermore, fuel cost is a big expense for airlines so an increase in crude price will have a negative impact on WestJet’s profit. Fortunately, right now the economy is doing well and the fuel cost is low. While these two factors should continue to be favourable for WestJet in the near term, no one can guarantee these factors will remain favourable forever.

Price competition is another risk that WestJet faces. As competition heats up, other airlines may reduce airfare to attract more customers. WestJet may be forced to do the same, causing the overall revenue to drop.”

After our investment of WestJet, the stock price went for a tumble due to some of the risks I mentioned above. This investment continued to be in the red until WestJet got bought out last year. We were fortunate that we came out of this investment positive because things  sure didn’t look great for a while. My investment in WestJet showed me that there are too many things that I did not fully understand about the airline industry. Things like oil price, travel demands, and competition were also difficult factors to assess. 

As a result, whenever I thought about investing in an airline stock, like Delta, my gut always reminded me that I did not have sufficient knowledge with the airline industry and that I should reconsider.

I was very close to pulling the buy trigger on Delta multiple times last year and earlier this year—but before putting in a buy order, I went with my instinct and stopped myself from placing the order.

Hindsight is always 20-20, but I am glad I went with my instinct and didn’t invest in another airline company, despite the fact that I really like Delta and the products and services they offer. In case you are wondering, Delta’s stock price is down over 50% from the February high and the company has suspended its dividend payments and share buybacks indefinitely. 

Take Diversification Seriously

During the current pandemic, the oil & gas sector has been decimated due to the ultra-low crude price and reduced demands. Over the past couple of years, we have been slowly reducing our exposures in the oil & gas sector by selling oil producer stocks like Royal Dutch Shell, Chevron, and ConocoPhillips. However, we still hold Suncor, an integrated oil producer. We also hold a number of pipeline companies because I believe that there will always be a need to transport oil and natural gas. Rather than holding these oil producers, we have slowly been increasing exposure in other sectors like consumer staples, consumer discretionary, and utilities. 

If I look at our dividend portfolio, the oil & gas (i.e. energy) sector is the second largest holding we have out of 12 sectors (financials, energy, healthcare, industrials, consumer staples, consumer discretionary, utilities, materials, REITs, telecom, IT, and index). While it would have been better if our exposure in the energy sector was a lot lower, our portfolio diversification meant the portfolio value didn’t drop as much as it could have otherwise. By holding sectors like utilities, telecom, and IT, it helped to reduce the downward price pressure caused by COVID-19. Furthermore, by investing in index funds like Vanguard Canada All Cap (VCN) and iShares All Country World ex Canada (XAW), we are able to diversify within the different stock sectors and most importantly, geographically. 

Putting all your eggs in one basket remains to be an extremely risky move. Diversification continues to be extremely important when it comes to investing. 

Stop watering the weeds

When you purchase a stock, the idea is to hold it and wait for the stock price to appreciate before selling (i.e. buy low, sell high). For dividend growth investors, the idea is similar but rather than selling the stock, dividend growth investors simply continue to collect dividends while the stock price increases and may never sell the stock. Unfortunately, it’s not a guarantee that the stock price will go up. From time to time, the stock price goes down due to various factors – the company may lose its competitive edges, the macro economics may change, the company’s financial outlook changes, etc.

For the most part, when we invest in a stock, we plan to hold it indefinitely, unless the company’s fundamentals and company strategies change significantly. In the past number of years, I seem to have consistently beat the TSX performance. However, it doesn’t mean we don’t hold loser stocks. For example, Magellan Aerospace, High Liner Foods, and Domtar Corp have all performed poorly from a stock price point of view. 

In the midst of the pandemic, I have questioned myself on whether or not to continue to hold onto these loser stocks that do not seem to have any financial improvements any time soon. For example, Magellan Aerospace manufactures aerospace systems and components. The company also repairs and overhauls, tests, and provides aftermarket support services for engines and engine structural components. Given that many people have stopped flying, resulting in air travel demands decreasing significantly, the demand for new aerospace systems and components have dropped. The need to repair, test, and provide aftermarket support for engines and engine structural components has also decreased. This means the future outlook for Magellan Aerospace does not look very good. Should I continue to hold, collect dividends, and hope the stock price will eventually recover?

Then I thought about an analogy. Would I continue to water the weeds in the garden hoping they would turn into beautiful flowers in the future? Or should I just take them out and plant some actual flowers? 

In the end, I realized that continuing to water the weeds and hoping they would turn into beautiful flowers in the future is absolutely insane. It makes no sense to continue holding onto these poorly performed stocks when I can have my money invested elsewhere.  

Stock Price is irrational. Always check the fundamentals

For a few days, Shopify Inc became the most valuable stock in Canada, de-crowning Royal Bank. The run up of Shopify stock price was contributed by more online shopping during the pandemic—but does this make sense? Consider this… Shopify had a revenue of $1.58 billion in 2019 but the company still posted a net loss. Meanwhile, Royal Bank had a revenue of $46 billion in 2019 and paid out $6.1 billion in dividends ($5.8 billion in dividends on common shares and $0.3 billion in dividends on preferred shares).

You don’t have to be a rocket scientist to understand that Royal Bank is a far superior company and makes way more money than Shopify. However, the stock price and the market valuation did not reflect this. Somehow, people valued Shopify more than Royal Bank. 

Throughout my investing career, I have learned that stock price is and can often be irrational. Many people invest with their emotions. So, when they hear that Shopify’s revenues beat analysts’ estimates and there has been an increase in online shopping, people get excited and make justification in Shopify’s stock price. The same thing happened with all the different cannabis stocks prior to the cannabis legalization here in Canada, when in reality few of these cannabis companies were making any profit. 

While hypes can drive a stock price in the short run, I have learned that fundamentals will always move the stock price in the long run. If the company’s fundamentals are excellent and the company continues to be profitable, the stock price will reflect this operational efficiency in the long run. Similarly, if the company’s fundamentals are poor and the company continues to lose money, the stock price will reflect this too. 

That’s why valued investing will always beat hype investing in the long run. Believe in the fundamentals!

Summary

2020 has been a wild ride so far. Due to the COVID-19 pandemic, I encountered another bear market and saw our portfolio value drop by close to $250,000. While it was difficult to look at this drop in portfolio value, the investment lessons I have learned throughout the pandemic have been extremely valuable. I continue to learn on a daily basis and continue to remind myself that I need to learn from my past mistakes.

I continue to believe that it is crucial to learn from our mistakes. In doing so, we become a better version of ourselves—and who doesn’t want that?

Dear readers, what investing lessons have you learned from COVID-19? 

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20 thoughts on “Investing Lessons I’ve learned from COVID-19”

  1. Thanks Bob for being so transparent. This is a great article and should remind investors that the market humbles us all. As a retiree with a pension I have learned how fortunate I am to have more income security now then when I was working. It was hard watching my children and friends lose their jobs, even temporarily. I have been trying to encourage them to increase their savings rate when they do return to work. I think a few of them get it now.
    IPL cut cost me a bit of income.

    Reply
  2. Thanks Bob for sharing the lessons you’ve learned from COVID.

    “Stop watering the weeds” is an interesting expression and so true. Understanding a company’s financial position really is key to avoid getting caught up in the latest crazes. My preference leans toward the telecom industry which continues to grow and expand.

    What are your thoughts on 5G technology?

    Reply
  3. thanks Bob

    i was most interested in your watering the weeds point too

    but my confusion is when do you sell ?

    i had an energy stock that dropped 70 % in the recent crash .. ( its come up to 40% down since then )

    i figured why sell at 70% down ; because i wouldn’t get much money back

    so why not wait ?? .. luckily it was the right thing to do

    is there a level when its ok to sell . ? such as 20 % down

    thanks

    Reply
    • I didn’t sell any energy stocks. We sold Magellan Aerospace, High Liner Foods, and Domtar Corp which all performed poorly prior to the pandemic. I figured there’s no point keeping these as I don’t see the pricing recover.

      Reply
  4. Great read Bob and thanks for highlighting your insights on the lessons you’ve learned.

    Personally, my investing routine hasn’t changed all that much due to Covid-19. I continue to stick to my original investment plan and follow my asset allocation while continuously rebalancing based on market movements. Keeping it simple as I can.

    I was expecting $6400 in total dividends for 2020 at the start of the year, and now I’m expecting around $6100 based on my current projections.

    DG Capital

    Reply
  5. As I moved through my investing education, the one that always stuck to me was the 2003 Air Canada bankruptcy. When I started investing in individual stocks, The one thing I swore i would never do was buy an airline stock. Very thankful I stuck with that plan!!

    Thanks for a great post!

    Reply
  6. I appreciate you being open on this topic. It’s tough to watch your portfolio drop and admit that you could have done things better. Without being honest with yourself, you will have a tough time getting ahead though. So, kudos to you. I am also trying to be more diversified and ensure I hold more cash in the future. Keep up the great work!

    Reply
  7. I love that expression “stop watering the weeds”. The trick of course is understanding what’s a weed and what’s a flower.

    This is one of the reasons why I create an objective scorecard and try to weigh things based on the results of more than one year (typically I’ll look at 3 years before I dump a stock).

    With a scorecard I remove my emotions from the equation, and try to score my weeds and flowers based upon fundamental metrics.

    Reply
    • Haha, if you ask my wife, she’d argue I can’t tell between weeds and flowers in our garden. Luckily, I think I can tell investment weeds and investment flowers. 🙂

      A scorecard is very beneficial for sure. Investing with your emotions doesn’t get you very far.

      Reply
  8. Nice read Bob.

    No question the whole scenario makes me want to focus on quality. Dividend kings or aristocrats.

    When I scan my whole portfolio all the losers are the ones with the worst dividend histories.

    Also makes me want to focus more on neccesitys and improve my tech sector. Working from home will be the new normal.

    Theres always something to learn. Glad to be learning these things while younger. The portfolio should be alot better off in the future for it.

    cheers Bob

    Reply
  9. Thank you for generously sharing your lesson learned, Bob!

    It is a great read and I just wanted to share my thought on your comparison of Shopify and RBC based on their 2019 revenues. The stock market is forward-looking, so a company’s future outlook is more important, isn’t it? SaaS companies such as Shopify is expensive for a reason — its revenue is recurring (collecting monthly subscription fees years after years); high gross margin (the cost of maintaining the platform is minimal); low debt…etc. Shopify can easily make a profit anytime if it chooses to, but that would not make sense given the “land and expand” nature of the sector. It makes more sense for them to spend more money on R&D and S&M now to grab as many customers as possible and lock the customers into their ecosystem with a high switching cost. COVID19 simply accelerates their expansion process. I agree with you that Shopify is overvalued, and I thought the same when I sold it at $652 CAD in March 2020 (I bought it at $278 in March 2019). I have regretted it ever since. A growth stock does need to be evaluated differently.

    Reply

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