Buried within the depths of most our memories is undoubtedly the bizarre era that was Covid-19. Like many of us, my consciousness has since repressed the days of mass lockdowns, invasive nasal swabs and the desperate panic of hearing someone cough within 5 feet of you.

As we all now exist blissfully in a post-covid life, I too, was melting into the July mundanity of processing a tax return when I was reminded of a dreaded loss I had made with the infamous ZIP Co (“ZIP“). The all too familiar Buy Now Pay Later (”BNPL”) player that rode highs among a handful of BNPL peers.

At the height of a global pandemic with nowhere to be besides my part time job and university I made my worst investment decision to date. Swimming in what a 21-year-old considers to be excess cash, I decided to put my funds to work after I realised the fruits of my arts degree were unlikely to meet my financial goals - shocker.

Having watched some of my friends’ rider the meteoric rise of Afterpay among many others. I decided to dip my feet in ‘conservatively’ staking most of my savings into one company.

After my shy contribution of $5,000 at a share price which was close to an all-time high, I revelled as I sat back and watched my investment skyrocket over the course of a few months. After a short period of volatility ZIP again reached all-time highs defying the among omnipresent whispers on the street of a BNPL crash. I was riding on a high, in a few months I was sitting on 50% gain and spent my spare time pondering the extravagant things I’d purchase once I cashed out. Perhaps I could even teach Buffett few things on how to manage his funds.

By the title you can guess how this played out. To my horror, I was indeed not the next Buffett or Ackman. Unsurprisingly, Buffett takes from Bogle’s The Little Book of Common Sense Investing and suggests a low-cost index fund is the most appropriate investment for most investors.

Within a month of watching my investment almost double, I was suddenly down 10-15% which at the time felt like a reasonable interim concession for the previous highs I had enjoyed. Out of defiance fuelled by nothing but a daydream, I held and held and held as I watched my savings dissipate to nothing.

When I reflect on this experience, several key lessons come to mind that I’d like to share with first time investors.

Not having a properly defined goal

My first problem was that I had no defined goal. When my investment almost doubled, I decided to stay in the game with a mix of hope and greed. This all came crashing to a halt a few months later when I realised the price was tumbling with no uplift in sight and commentators suggesting that the entire industry was overvalued. I invested with no consideration of a long-term goal or my financial situation.

Sometimes it’s as simple as knowing when to quit. 6 months after my investment I was running on a high and had made an amount reasonable enough to cash out. But I wanted more. In his 2000 Letter to Shareholders, Warren Buffett stated that “nothing sedates rationality like large doses of effortless money” and effortless money was exactly what it was. Although arguably my rationality had ceased from the minute I placed a buy order for one stock with the bulk of my savings.

Had I defined my simple goal of increasing personal wealth, I believe I wouldn’t have purchased ZIP shares. Setting the fundamental flaws in ZIP aside, this would have guided rational decision making and considered wealth over the long term, rather than aiming for short-term spike. A long-term view might have triggered a different approach. Something I explore later when I compare what my initial investment might have looked like taking a more conservative, long-term approach through investing in an exchange-traded fund (“ETF”).

Understanding why you’re investing is arguably as important as understanding what you’re investing in. This is why setting an investment goal is the first step to success and ensuring that you know what you are investing for. You can read more on how to go about setting one here.

Lack of understanding the fundamentals

Now you’d think that before I sunk the majority of my life’s savings into a single equity I’d done extensive research to justify this move. The reality was far from that.

Did I read a financial statement? No. Did I understand the fundamentals of investing? No. Did I want to get rich immediately? Absolutely.

The red flags were there throughout my investment period and had I known how to identify them, perhaps I wouldn’t be here writing this article. My investment was purely driven by macroeconomic factors that I believed created a fruitful environment for ZIP’s shares to rise. I ignored the fundamental shortcomings of the company at the time.

When ZIP was at the peak of its performance, our analysts published a report warning that whilst the products were resonating and growth prospects were reasonable, there were significant capital and regulatory issues and the shares were exceedingly overvalued.

According to a study by the British Columbia Securities Commission, young people are increasingly making more speculative decisions when it comes to investing and preference owning individual stocks as opposed to a basket through an ETF. If I ran this same exercise within the same investment timeframe with the BetaShares NASDAQ 100 ETF NDQ for example, my outcome would have been significantly better.

Figure: Comparison of ASX: ZIP and ASX: NDQ weekly share performance from August 2020 to November 2023.

Having a sound understanding of the factors that drive intrinsic fair value, as well as recognizing the backdrop of macroeconomic factors, competitive forces within the industry and general market volatility is essential in understanding whether you are making an informed investment decision.

Not considering economic environment

At the time Afterpay had already seen an implosion and was attracting the primary attention of the media with speculative punters waiting for it to surpass $100. Due to the congestion in that space, I thought an investment in the lesser-covered ZIP meant I was getting ahead of the curve.

Perhaps even the equivalent of buying bitcoin in 2010. However, what I did not realise was that the entire industry was saturated with momentum, which was inflating ZIP’s value, despite being in Afterpay’s shadow. Context is important in investing, as all companies exist and perform relative to each other.

Morningstar’s Economic Moat rating refers to a company’s competitive advantage amongst its peers and is a crucial part of our rating system. You can read about moats in detail here.

At the height of the Covid-19 pandemic, consumers flooded to BNPL through a rise in e-commerce driven by the shutdown of physical stores. This not only raised visibility for such platforms, but also provided peace of mind during a period of economic uncertainty as BNPL players promised immediate access to funds and repayment schedules with little to no fees.

However, ZIP was awarded a no moat rating at the time due to higher than expected credit losses, the industry’s low barriers to entry, increasing regulatory scrutiny and lack of product differentiation. Moat rating alone cannot dictate the fair value of a company. However, it does determine which players hold competitive advantage within their industry.

These are all key criteria which may have foreshadowed the inevitable crash of ZIP and other BNPL’s once the market had regulated itself.

Lessons taken

Speculative ill-informed decisions more-often-that-not end in poor outcomes. First time investors should use my $5,000 mistake as a lesson to not fall victim to market noise and temporary fluctuations with the promise of effortless gains.

Surprisingly my interest in financial markets weren’t dampened after this event – instead I went on to pursue further study in finance. Despite the education and knowledge that I gain daily I know that i won’t to be right all the time or even 50% of the time. Understanding this has led me to direct my personal investments to ETFs as opposed to single stock picks.

I find that ETFs save the time required to research individual securities and takes the effort of active decision making out of my hands. This also provides my portfolio with a higher level of objectivity and validated by a team of expert fund managers who consistently monitoring the basket of equities. Intuitively, the diversification also removes single stock risk and volatility which is smoothed by the larger pool of stocks.

This often helps me drown out the temptation to speculate –much like the guy at the bar trying to convince you his stock pick is the next Apple. With lower transaction fees and ease of accessibility, there are various platforms that now allow first-timers to comprehensively understand and screen ETFs to match their goals.

Certainly, ETFs won’t be appropriate for every investor. But I believe they’re a great way for beginners to dip their feet in the market with the reassurance that may come with a supervised group of securities.

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