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"In the investment business, you go to school every day, but never graduate." - Don Hodges

Lead Me Not into Temptation - Chasing Highflyers and the FOMO Factor

by Alan Ebright, on Jul 25, 2021

So, there you stand in your neighbor’s yard for the summer cocktail party. Talking amongst your peers about the usual topics; the weather, sports (Milwaukee Bucks win the hardware….crazy, right?), the newest restaurant, and then suddenly someone starts talking about the stock market and how much money they’re making. Typically, this discussion sets in at about the 3rd cocktail, and it’s started by the person who, prior to this discussion, you would have never guessed had any money in the market at all.

You’ve probably been in these types of conversations, and when markets go vertical, as we’ve seen since March of 2020, they’re even more common. Sometimes they’ll disguise themselves as some sort of bizarre statement. “That Dogecoin has been very, very good to me”, or “Glad I started following Stocktwits.” You smile, and raise a glass to their success, yet you haven’t heard of either. Dejected, you wake up the next morning, look in your portfolio, and it seems boring. Even if it’s doing well, it just seems mundane, and you feel the urge to explore Dogecoin and join the Stocktwits community for all the nifty ideas you’ve been missing.

Don’t Do That! I’ll say it again, Don’t Do That! This type of action is all too typical, and it’s driven by 100% emotion. Your neighbor’s current success and talking about things you’ve never heard can create an incredible amount of curiosity. Afterall, we’re only human. Wired since birth for fear and greed. You throw money into those emotions, and those feelings that drive the Fear of Missing Out (FOMO) become hard to ignore.

In every market cycle there are certain industries that get much investor attention. It’s either a “new” industry or an old industry with a new twist. What I think people forget is that stocks are shares of actual companies. Whether a company is new or old, it is subject to the same market forces that have been around since the dawn of capitalism. New industries pop up, first movers take market share and enjoy outsized profits…for a while. Competition eventually arrives, margins get compressed, and perhaps even the market (for their products) starts to shrink. The cycle then reverses, and only the strongest and well capitalized companies survive. The late 90’s technology boom was one of the greatest examples of this in somewhat recent history.

I’ll share with you a wonderful story from the late 90s, and it’s about someone who is spectacularly famous, yet received close to zero respect for a few years. This investor, in the years 1996-1999, returned the following (in order): 31.8%, 34.1%, 48.3%, .5%[1]. Yet, during the same 4-year period, the bellwether technology index, NASDAQ, returned the following: 42.5%, 20.6%, 85.3%, 101.95%[2]. The internet boom years were upon us and they were touted as “the new paradigm.” I remember reading an article that hypothesized that this investor had either lost his mind, failed to understand this new paradigm, or had dementia. Fast forward to 2000-2002, and we know what happened to all thing’s “tech”, and it wasn’t pretty. Three really brutal years, and those years hurt many investors. Oh, I almost forgot. Who was that investor you might ask? The legendary Warren Buffett!

Mr. Buffett has always been a believer in buying things that are time-tested and at reasonable valuations, and there wasn’t a single stock in the NASDAQ that fit his parameters. Sticking to investing fundamentals, which is sometimes quite a challenge for the typical investor, is one of the very best reasons to work with a professional money manager. Having the ability to cast aside certain opinions and biases comes from experience in investing over many decades. Sorting out news from noise is another accolade of the professional money manager, as is keeping client’s emotions grounded. This is what we practice here at Hodges.

Sometimes the best investments are the one’s in which you do not invest.” – Jim Edson

 

[1] Source: Slickcharts/Nasdaq 100 returns
 [2] Source: Gurufocus/warren+buffet profile

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