Three lessons from 10 stock picks at the bottom of the COVID crash

Amid massive fear in the markets, it's hard to be the bold contrarian...

But that's exactly what I was back in March 2020. When investors panicked in the early days of the pandemic, triggering the fastest market decline in history – the S&P 500 Index dropped 34% in only 22 trading days – I saw that the sell-off was overdone.

I shouted from the rooftops to anyone who would listen that it was an incredible buying opportunity. The very day the market bottomed on March 23, 2020, the I said in my daily e-mail that day that "this is the best time to be an investor in more than a decade."

Back at my former firm Empire Financial Research, my friend and then-colleague Enrique Abeyta and I rushed to put together a special presentation to explain all the details of why we thought this was such an incredible time to be investing – which we taped on March 23, right when the market bottomed... and aired it the next day.

As part of our presentation, we recommended five conservative, large-cap stocks – Berkshire Hathaway (BRK-B), Amazon (AMZN), Alphabet (GOOGL), General Dynamics (GD), and Altria (MO).

We also recommended five aggressive, smaller stocks – Tripadvisor (TRIP), Capri (CPRI), Spirit Airlines (at the time, trading under the ticker SAVE), Penn Entertainment (PENN), and Howard Hughes (HHH) – that had been decimated because they were in industries that were hit hardest by the pandemic: travel, retail, casinos, and real estate.

Today, let's take a quick look back and see how those stocks have done since then – and I'll also highlight a few important lessons...

First, here's a table showing the stocks' performance relative to the S&P index since March 24, 2020:

At first glance, we didn't do so well. Those 10 stocks have risen an average of 81% versus 143% for the S&P 500.

But keep in mind that we separated the stocks into two groups for a reason: the five conservative stocks were for "buy and hold" investors – and, sure enough, they've almost exactly tracked the fabulous performance of the S&P 500.

Meanwhile, we were clear that our five aggressive stocks were shorter-term trades of oversold stocks... So a better way to evaluate them is to look at how much they rose from where we recommended them to their peak.

Here's the same chart, with two extra columns showing the maximum price each stock has reached since March 24, 2020:

Now the difference between the two baskets of stocks becomes clear...

Like the S&P 500, the five conservative stocks are all near their all-time highs... so their average maximum gain of 166% isn't much higher than their gain of 144% through recent prices – and the same is true of the S&P 500 (150% versus 143%).

But the story is completely different for the five aggressive stocks. Every one of them at least doubled from the price at which we recommended it – even the worst performer, Spirit Airlines (which recently filed for bankruptcy), was up 139%... and the best, Penn, was at one point up more than 10-fold!

On average, investors could have made more than 5 times their money (406%) by the peak versus "only" 150% had they bought the S&P 500 at the same time.

With that in mind, let me highlight a few lessons here...

First, true investors (as opposed to speculators) should be happy when the stock market is crashing. It's when other investors are panicking – the most recent, dramatic examples I remember well are October 2002, March 2009, and March 2020 – that those who can keep their wits about them can make fortunes.

In the wise words of Warren Buffett, "be fearful when others are greedy, and greedy when others are fearful." Here's an excerpt from his 1997 letter to Berkshire shareholders on this topic that I shared recently:

If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?

Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?

These questions, of course, answer themselves. But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?

And as Buffett continued in the letter, "Many investors get this one wrong":

Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

The second lesson is to be clear about your objectives and what kind of stock you're buying.

If you want to keep it simple – holding a concentrated portfolio, doing very little trading, and sleeping soundly every night – then great... this should be the default option for most investors, as I've been saying for 25 years.

But the trade-off is that, even if you do this well, it's hard to vastly exceed the market's returns – just look at the five conservative stocks that Enrique and I picked.

On the other hand, if you have a higher tolerance for risk and volatility – and want to invest at least some of your portfolio more aggressively, looking to catch a sharp rise in an oversold stock or sector – that's fine, too. But then you need to make more sell decisions.

For example, if a stock quickly doubles, that could mean trimming a position if it gets to an oversized portion of your portfolio... selling half your position to locking in gains and thus play with "house money" with the remainder of the position... or using a trailing-stop strategy. Again, look at the returns of the five aggressive stocks that Enrique and I picked.

Of course, there's no one-size-fits-all solution for handling big returns like that – as I've said many times, it obviously depends on things like risk tolerance, investment approach, portfolio size, net worth, etc.

A final lesson is that it's better to be roughly right than precisely wrong.

I'd like to say that I perfectly nailed the exact bottom during the COVID crash... but on March 13, 2020, I wrote that I was "trembling with greed."

That comment was 10 days early – and the market fell more than 10% afterward. But it didn't make much difference. Had you invested in the S&P 500 on March 13, 2020, you'd still be sitting on a wonderful 120% gain.

The point is that no matter when you invested during this market panic, you did well – but only if you invested. If you had sat in cash and waited for sunny skies, you would have missed most of the gains.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.