Buried in the depths of our memories is undoubtedly the bizarre era that was Covid.

Like many of us, my consciousness has since repressed the days of mass lockdowns, invasive nasal swabs and the sudden panic of hearing someone cough within 5 feet of you.

As we all now blissfully exist in a post-covid world, 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.

The story

At the height of a global pandemic with nowhere to be besides my part time job and online uni, 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 enjoy the meteoric rise of Afterpay, 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 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.

By the title you can guess how this played out. To my horror, I was indeed not the next Oracle. Turn out, there’s a reason why he suggests low-cost index funds for most investors.

Within a month of watching my investment almost double, I was suddenly down 10%, 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 clear goal

When you partake in the market with the vague goal of ‘getting rich’ you’re much more likely to make terrible investment decisions, especially during volatile times.

After my investment almost doubled, I decided to stay in the game with a mix of hope and greed. This all came crashing down a few months later when I realised the price had tumbled with no uplift in sight. I invested with no consideration of a long-term goal or my financial situation.

Ignoring proven advice can cost dearly. 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 some would argue that my rationality had ceased from the minute I placed a buy order on one company with the bulk of my savings.

Setting a goal or target would have probably resulted in a more favourable outcome. Taking a long-term view might have even triggered a different approach.

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.

Understanding the fundamentals

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

Did I read a financial statement? No. Did I understand the fundamentals of investing? Not really. Did I want to get rich quickly? Absolutely.

The red flags were there throughout. Had I known how to identify them, perhaps I wouldn’t be here writing this article. My investment was primarily driven by conviction on macroeconomic factors that I thought created a fruitful environment for earnings to rise.

Notably, I also ignored the other 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 over ETFs.

Having a sound understanding of the factors that drive intrinsic fair value, as well as recognising 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 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.

However, what I did not realise was that the entire industry was saturated with momentum, which was already 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 BNPLs after the shutdown of physical stores drove a rise in e-commerce. This not only raised the visibility of 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 negligible fees.

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.

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 for 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. But i acknowledge that all the education and experience in the world doesn’t mean I can 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 and manage a portfolio of individual securities. It also provides my portfolio with a higher level of objectivity which is validated by a team of fund managers who consistently monitor 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 penny stock pick is the next Nvidia. 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.

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.

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