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Top 5 Failed 2020 Investments

Securities Lawyer Jonathan Kurta
By: Jonathan Kurta Author

If you suffered significant losses after purchasing a “trendy” stock in 2020, you may have a case for a securities lawyer. Brokers and financial advisors are supposed to make sure their customers understand the risks of betting big on a single stock and should not oversell a stock’s potential for massive gains. Keep reading if you are looking to recover from a bad pandemic investment.

Historic Stock Returns

Research indicates that index funds that track the performance of a bundle of stocks perform better over time than stock picking. The S&P 500 tracks the top 500 U.S. stocks – instead of relying on one of those stocks to perform well, the S&P 500 index fund provides returns for based on the stocks’ collective performance. One stock may perform exceptionally well, and another might unexpectedly tank, but the stock market generated a healthy return of approximately 12% over the ten years ending in 2023.

But the temptation to buy stocks that appear poised for explosive growth can overpower dry logic. In 2020, several stocks saw massive upswings. Many of these companies have suffered dramatic losses following the end of pandemic restrictions. Brokers and financial advisors, excited by massive spikes in share prices, may have encouraged their customers to overconcentrate their portfolios in these trendy stocks, even though investors rely on their professional expertise to avoid common investing pitfalls. No matter how exciting a company may seem, financial advisors have no way of knowing that any one investment will continue to enjoy rapid growth.

Which Stocks Lost Investors the Most Money?

The following is a short list of stocks that experienced massive growth in 2020 and 2021, only to suffer major losses in the next two years.

Peloton

Peloton stock prices fell 97% in 2023 from its highest price in 2021. Once gyms started to re-open, customers no longer felt as inclined to rely on Peloton’s at-home workouts. Demand for Peloton was based specifically on Covid restrictions, and savvy financial advisors should have been aware that changing demand could drastically affect its prices.

Roku

From 2021 to 2024, Roku’s share price dropped 82%. It is not a profitable company, despite its rapid growth as a TV operating system. The company sells TVs and USB sticks at a loss and plans to achieve profitability through digital advertising. Brokerage firms that adequately performed due diligence on Roku would have considered the firm’s lack of profitability before recommending its shares to their customers.

Shopify

Shopify stock prices have been particularly volatile over the past few years. According to Motley Fool, share prices increased over 380% from March 2020 to November 2021. In the following year, it dropped 75% in value, and in 2023, it increased by 97%.

This recent spike in share price is not the first time Shopify has experienced volatility. In 2017, Citron Research published a report stating that Shopify overstated its money-making potential. The report led to a considerable 11.5% drop in stock prices. Brokers should know that Shopify is still a speculative investment.

Netflix

In 2022, shares of Netflix fell 22%. Funds like Pershing Square that invested heavily in the streaming service suffered major losses. A letter from Netflix to investors stated that after disappointing subscriber growth, Netflix modified its business plan and the fund believed those modifications made it too difficult to “predict the company’s future prospects with a sufficient degree of certainty.”

Zoom

Zoom traded for $559 per share in 2020. By the end of 2023, shares were approximately $72 – that’s an 87% drop. Its success stemmed from so many workers newly working from home. After workers began to return to the office and the application saw increasing competition, the company could not maintain its explosive growth.

How Did Investors Lose Money?

Investors in trendy 2020 stocks should be aware of two types of broker misconduct in particular: Overconcentration and margin abuse.

Both of these investment strategies may be unsuitable, in violation of FINRA Rule 2111 and Regulation Best Interest. FINRA Rule 2111 prohibits brokers from recommending unsuitable investments, i.e. investments that are overly risky for an investor’s needs. Investors inform their brokers at the outset how much risk they can tolerate. Risk means the chance for bigger returns, but with a greater risk that the investor will lose part or all of their principal investment.

Younger investors may want moderate risk since they have time to recover if they suffer losses. Retired, elderly investors and investors who rely on their investment portfolio for income cannot afford this type of risk and typically specify that they prefer conservative investments.

Overconcentration

In addition to recommending investments that suit an investor’s best interests, brokers are also required to employ suitable investment strategies. These strategies should factor in diversification, and not overconcentrate their investors in any one stock. Too much of any single stock exposes brokers to unnecessary risk. Unpredictable forces can cause a single stock’s price to plummet, and a portfolio with a wide variety of stocks and assets will not suffer disproportionate losses.

Margin

Margin accounts use money borrowed money from a firm to purchase more securities. Brokers may have encouraged investors to use this strategy to avoid missing out on massive returns. What they may not have told investors, however, is that margin loans come with interest. Furthermore, margin accounts have minimum deposits. If the account value drops below a certain threshold, the broker will make a “margin call” to the investor, informing them that they must deposit funds into the margin account or risk having securities liquidated in order to meet the minimum requirements.

If investors suffered unexpected losses after they made investments on margin, they may have a case for an investment fraud lawyer.

I Lost Money on Peloton (or Another Risky Pandemic Stock). What Next?

Contact our team of experienced securities attorneys if you lost money on a risky investment strategy. Our lawyers are familiar with the rules and regulations designed to prevent investors from losing money on unpredictable stocks. Call (877) 600-0098 or email info@kurtalawfirm.com.

Securities Lawyer Jonathan Kurta
Written by: Jonathan Kurta

Jonathan Kurta is an accomplished securities attorney and a founding partner at Kurta Law.