Investing in the share market can be a scary plunge to take when starting out as a beginner. There are many lessons that are best to learn through experiencing them firsthand.
However, today I want to share with you the lessons I learned from holding Afterpay Ltd (ASX: APT) shares since 2017, through the ups and the downs, all the way to a 20x return!
Owning Afterpay shares has been lucrative for many investors, with the Afterpay share price appreciating by an astounding 283% in the last year alone, compared to the S&P/ASX 200 Index (ASX: XJO) which fell 2.15%.
The question is what kind of volatility can be expected as a shareholder for these market-beating returns, and what lessons might you be able to apply in your own future investments?
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Buckle up, it's going to be a wild ride
Although each year since listing Afterpay shares have finished higher than they started, there have been dramatic drops in the share price in this time as well – at one point in 2019 shares were down by 26.2%, while 2020 saw a hefty 78% drop, its largest to date.
These massive share price swings are typical of higher-risk investments, where the long-term potential of the company is not yet clear and fundamental analysis is difficult. This leads to the share price being heavily influenced by developments in the industry, general news, and broker ratings.
Over the years there have been many challenges that have put pressure on the Afterpay share price:
- Regulatory: In June last year Afterpay had a knock on its door from AUSTRAC (Australian Transaction Reports and Analysis Centre) requesting an audit to assess compliance with anti-money laundering and counter-terrorism financing laws.
- Competition: Investors grew concerned as competition built from the likes of Visa Inc, MasterCard Inc, PayPal Holdings Inc. and a slew of ASX-listed buy now, pay later (BNPL) entrants. Afterpay shareholders were particularly concerned when PayPal announced its 'Pay in 4'' instalment offering, with the news shaving 8.04% off the share price.
- COVID-19: During the peak of the coronavirus-induced market crash, Afterpay's share price fell 78% as the fear of customers not paying off their instalment purchases grew.
At any of these points, I could have sold into the fear for a far smaller profit than 20x. Instead, I remained optimistic by focusing on the core reason why I invested in the first place.
Understand the business
In order to confidently hold onto your shares while the market is selling off, you need to know how the business works, how it is differentiated from its competition, and why you invested in the company to begin with.
In the case of Afterpay, the company makes money by charging a merchant fee on each purchase, not the customer (excluding late fees). This is actually a key point of difference to the high-interest rates charged by credit cards.
The fundamental reason why I initially invested was the cult-like popularity of Afterpay amongst the younger demographic. This remained unchanged.
Whatever it is that you have invested in – understand the business. This will give you the fortitude to hold when the broader market is caught up in a short-term panic.
Ignore the noise
It's important to keep up to date with your investments, but it is easy to get caught up in dramatic headlines if you're not careful.
A helpful trick I found with Afterpay is to try to consume a balanced diet. That is – for every negative perspective you read or hear, try to find a positive take, and vice versa. The truth is often somewhere in the middle. You will become much more informed and less likely to make a short-term irrational investment decision.
For every buyer, there is a seller in the share market – you'll always be able to find people with the opposite view to you. This is where it's important to focus on the company's reported numbers, such as earnings per share (EPS) and revenue growth – these don't lie.
De-risk to match personal risk tolerance
The last lesson is to know your personal risk tolerance. You should only risk what you are willing to lose – that includes profits.
I took some profits off the table when the Afterpay share price was around $15 and again after it cracked the $40 mark – not because I didn't believe in the company anymore, but because I personally couldn't bear to lose the profits that I had made at those points.
Investing is a long-term game – and to succeed you have to stay in it. Take action to ensure that your strategy is sustainable. Too many investors have given up on lifelong returns as a result of 'blowing up' their accounts by taking on more risk than they could stomach.
