The good thing about investing is you can learn from your mistakes. The bad thing about investing is those mistakes can be especially painful.
As I look back on my investing moves over the past few years, I can't help but return to one I wish I could take back: my investments in Peloton (PTON 4.29%). This isn't to say I wouldn't invest in Peloton at all (although it's easy to make that argument now with the stock down 97% from its peak), but my approach would've been a lot more disciplined.
Blinded by the thought of quick gains
I made my first investment in Peloton in early 2020, anticipating the surge in demand it may experience with COVID-19 causing lockdowns worldwide. It was a simple decision in my mind: Closed gyms would force people to rely on at-home fitness equipment. To my credit, that's exactly what happened.
Peloton became the face of at-home workouts, and its stock price soared, increasing over 560% from March to October of 2020. Unfortunately, Peloton stock's initial success was the catalyst for my mistake. Seeing my investment double in less than two months caused me to lose discipline and become overly confident.
Seeing how fast Peloton stock was rising, I rushed to add to my position, hoping to get in early enough to catch enough of the bull run. Before I knew it, I had veered from my typically disciplined approach, and Peloton made up more of my portfolio than it should've.
Unfortunately, my personal stake in Peloton is now down over 90%.
The importance of due diligence
Most people wouldn't (and shouldn't) buy a car without test-driving it, buy a home without having it inspected, or enroll in a university without visiting its campus. The same thought process should apply to buying stocks. You shouldn't blindly invest in a company without doing your due diligence.
With investing, due diligence involves thoroughly evaluating a company before making a decision. There's no cookie-cutter approach to the process, but it generally involves analyzing and understanding as many aspects of the underlying company as possible to make sure it aligns with your goals and risk tolerance.
Despite knowing the importance of due diligence, the thought of quick gains weakened my discipline.
What due diligence should I have done for Peloton?
With hype around Peloton at its peak and the stock surging, I overlooked several warnings.
First, I should've thought more about market trends and consumer behavior. Would stay-at-home measures cause people to embrace the at-home fitness trend? Absolutely. However, those measures were never going to be permanent, and I should've thought about what would happen if people eventually reverted to their pre-pandemic workout habits (which they did).
That point leads to the need for risk assessment. I knew Peloton would eventually hit a growth slowdown, but I didn't fully consider the demand risk to the business as the pandemic threat no longer loomed -- and neither did the company's management. You can never go wrong asking yourself, "If the worst-case scenario happens, what will happen to the business?" Even if you don't believe the worst-case scenario is likely, it's good to have an idea of what to expect so you can prepare accordingly.
The other point I should've paid more attention to was Peloton's valuation and how it didn't align with the business's fundamentals. Pre-pandemic, Peloton's price-to-sales (P/S) ratio was hovering around the mid-single digits range. It naturally shot up as its stock price rose.
Data by YCharts.
Doing my due diligence would've forced me to question jumping on the rally for such an expensive stock. Sometimes, a company has the fundamentals to justify a higher-than-normal valuation. In other cases, it's a recipe for falling victim to a market correction and the resulting plunge. Peloton proved to be the latter.
Of course, much of this is easier to say in retrospect, but the overall point remains: During bull markets, it's important to remain disciplined and avoid chasing short-term gains because the risks often outweigh the potential benefits.
Once was enough for me, though. I won't be making the same mistake again.
