FOMO (Fear of Missing Out)

“Can I keep everyone focused on the big picture and their true financial objectives in get rich quick environment that’s turned the markets into a 24 hour virtual casino?” – Downtown Josh Brown

My friend Josh Brown celebrated his 44th birthday on February 25th (Happy birthday Josh) and he wrote that sentence on his blog. It got me thinking about myself, the markets, Baird’s clients, and how we’ve entered this weird World where NBA highlights are selling for thousands of dollars and lines of computer code are worth $50,000 a “coin”.

Now look, I’m not here to rage about that or tell you those things are obvious bubbles. First, who am I to say anything is a bubble and second, if a bunch of people think something is true that is a powerful force. Homes, Bitcoin, NBA Highlights, Digital Art, Gold, Stocks, these kinds of assets (whether they are physical or digital) have value because other people agree they do, and the “price” of something is what other people are willing to pay for it not some discounted cash flow times a discount rate.

Instead, I wanted to use this blog to examine my own FOMO and some of the stories I’m hearing about people with well diversified financial plans seeking to chase fad investments because one of their friends at the club said they made a ton of money on Stellar Lumens (I literally have no idea what that is but apparently it’s a thing).

It’s really hard to watch other people get rich and not want to join in, especially in this version of the World where throwing money at something requires pushing a button on a phone. Magnify that by the fact that we are ensconced in a 24-hour social media cocoon where people flaunt their “gainz” like they are Cortez who just discovered the New World. 

I’ll admit, I get FOMO badly. Why? Because I’m a human being and I have a brain wired for things like envy, greed, and gluttony (I ate half a bag of Cheetos the other day).

The question you (and I) need to ask ourselves is “what kind of an investor am I?” How have I acted in the past because that’s probably the best indicator of how we’ll act in the future. 

Did you sell in March 2020 because you couldn’t handle the COVID crash? Did you let politics impact your portfolio last November? If you answered yes to one (or both) how are you going to handle the unprecedented volatility of high beta Growth stocks or crypto? If stock market selloffs and political views can make you course correct are you really geared to invest in stuff like this?  

Bitcoin, for example, has had multiple 60% drawdowns in the past three years and 30% selloffs are fairly common. What would happen to the value of digital collectibles if all of a sudden people get bored with them? 

Growth stocks, which have caused many investors in well diversified plans to chase them due to FOMO, are getting smashed right now because the market is expecting economic growth to SOAR in the near future and that style of investing would be out of favor. What if you end up with a portfolio of stocks that goes nowhere (or down) while you watch the economy BOOM because that could happen if you’re in the wrong names.      

Advisors have a fiduciary duty to their clients to act in their best interests, that means setting investments to meet the goals of a financial plan. If the plan has changed to “I want to get rich quickly on fad investments and chase the hottest sectors of the market” how can those two plans co-exist alongside the fiduciary responsibility?

That being said, there is a more nuanced take to all of this. If you’ve meticulously funded your big picture with a well-diversified plan, basically committed to eating your peas and carrots, it’s ok to dive into that ice cream sundae from time to time, just do it responsibly. 

Again, we are only human, we don’t live in financial planning software, if you’re seeking to scratch an itch you must understand that risk and return go hand in hand, so do it in a way that doesn’t threaten your goals.

The absolute best investors have learned to ignore FOMO, in a perfect World no one would care what their friends are invested in or how that person on TikTok did in Gamestop. Warren Buffett once said It’s insane to risk what you have for something you don’t need” and he’s right, make smart decisions with your money not ones driven by emotion.

The Game Never Stops

By now you’ve probably heard about the action in “meme stocks” like GME and AMC, and while there are roughly 1.2mm takes on what’s been happening in them I thought I’d weigh in on whether you should care or not.

What is a “meme stock” exactly? It’s a stock that gets broad support from retail investors simply by being made into a meme. Remember those hilarious Bernie memes (this one my favorite), now imagine someone did the same for a company stock and that was enough to get people excited about investing in it.

If you plan on being an investor you are going to have to accept the fact that memes can move markets, and if that seems ridiculous to you then I’m sorry, the World changes rapidly. Wait until I write a 400 word blog post on Tendies.

Why did GME, one of these “meme stocks,” rise so rapidly? Turns out it was a heavily shorted name among the Hedge Fund community and all it took was a surge in retail buying (both in the stock and options) from a forum called “Wall St Bets” to set off a feedback loop that ripped the stock higher. Trading in some of these names was briefly halted last week (for Wall St back office plumbing issues) but as of today the action is still frenetic.

Is what we are seeing unique? In one way no, the act of speculation is not new, it's a tale as old as time. That being said, in this era investor attention can be brought to bear instantly by social media, action can be implemented for 0 commission both in stocks and options, then watched in real time on a phone from anywhere in the World. That is new, and we don’t know what the ramifications of that will be going forward.

History is rife with events like we are currently witnessing, manias created in stocks that end up captivating the public's attention. These events usually start small, among a tiny group of investors, but then work their way into the public domain because more and more people start to pay attention. This has been accelerated because we are 1) still stuck in our homes due to a pandemic 2) a bit bored 3) always in contact with each other via social media and 4) have unlimited access to financial markets / instruments.

Here’s the thing though, YOU DON’T HAVE TO PLAY THIS GAME. I know your FOMO is kicking in reading about 34 year olds who turned $50k into $48 million. I get it, I feel it too. I’m on Twitter and in this blog telling people to eat peas and carrots while a buffet of candy and champagne is being gorged on.

This is a fact: one of the central failures of investors is leaving their playing field for a different one because they get scared or greedy.

Imagine your playing field consists of Target Date funds and bonds and cash and you look over at some guy throwing the equivalent of a Vegas pool party, it’s going to take a lot of self-control to avoid wandering over and participating.

Play your game, ensure that you are doing everything you can to reach your goals but look, if you want a little pile of money to play around with trading stocks there isn’t a person whose opinion I respect who would say that’s a bad idea. Just keep it small and contained to scratch that itch. Don’t act recklessly.

In the end we are human beings, we don’t live on a financial planning spreadsheet, the urge to speculate in a frenzy can bring vast rewards but it can also bring pain and regret. The line between success and failure is razor thin. 

The investing game, the REAL game, never stops, don’t let events like this one change who you are and what you believe in.

 

 

Investors should consider the investment objectives, risks, charges and expenses of the fund carefully before investing. This and other information about the fund can be found in the prospectus or summary prospectus. A prospectus or summary prospectus may be obtained from your financial advisor or the fund website and should be read carefully before investing.

You've Got Mail

We live in a world where people are bombarded with information daily. It’s been said a typical person consumes more information in 24 hours than someone in the 1800’s did all year long. 

That information can be found in the media, on social networks, from their friends, in their email, and on and on. Often the story is troubling, playing on peoples’ fears and positing a worst-case scenario happening. You’ve got mail, and it’s super scary.

“The Dollar is set to implode”

“Hyperinflation is near”

“The Stock Market is going to crash”.

Those headlines demand your attention because someone telling you how bad things might get appears as if they are trying to help, even when that’s usually not the case. Fear inducing statements can be dead wrong for months upon months, with absolutely no loss of reputation. Why?  

That's why, because fear sells, and humans always want to know what could go wrong. We are risk averse animals by our very nature, we can’t help it. Pessimism is a seductive message that preys on deep-seated fears about an unknowable future. Tell a person to be afraid of something and you will almost always have their undivided attention.

I spend most of my time harping on the antithesis of that idea, writing (and speaking) about certain themes in markets and investing that I believe lead to success: emphasize good behavior, think long-term, ignore the noise, focus on your plan, listen to an advisor.

Most of these ideas are rooted in optimism because investing for the long-term is akin to betting on the world improving over time. Howard Marks said in his latest memo: "To be a good equity investor, I think you have to be an optimist; certainly, it's no activity for doomsayers."

If one of the best investors of all time says investing is “no activity for doomsayers” why would you let these scary stories impact what you do?

So, dear reader, here is my plea to you before you forward an email to your advisor and say, “this seems bad, should we do something?”

Think about the sender and what their motivations are. Does that person know anything about you? What your hopes and dreams are, what kind of investment strategy you’re using to reach those goals? What is the author selling?

How does that person know what the future will look like (at least any more than anyone else)? How many “worst case scenarios” described in an email or a social media post actually end up happening?

If the World is about to end, and the economy is set to collapse, and we’ll be bartering for food with bottle caps, you have bigger problems than how much Microsoft you own (also that gold is going to be really hard to spend).

The fewer scary stories you read, the less likely you’ll be to look at the market every day, the better off you will be on your pursuit to financial freedom.  

Just like you wouldn't take medical advice from an email, don't take financial advice from one. Fear always sells, but you don’t have to buy it.    

2021 "Outlook"

Now is the time of year when we are bombarded with “outlooks” and “commentary” about what to expect in 2021. It’s natural of course, people are thirsty for guidance in an uncertain world, market outlooks in January are as common as resolutions and usually just as impactful.

In the interest of full disclosure here is what I said, word for word, in January of 2020:

Growth still positive but slowing. New Home Sales/Employment Growth/Hotels/Vehicle sales all the significant growth is behind us.  

Employment is still solid and Household Debt Service is at a record low

Presidential election years since World War II have tended to see stocks struggle early, rally late (after election uncertainty subsides) and finish with an average gain of nearly 7%.”

How did my “outlook” do? Well, the S&P500 ended the year up a little more than 18% after undergoing a macro shock, social unrest, a Presidential election, and market volatility akin to that of the Great Depression. I correctly predicted the market would be up, but, if we use the history of the market, stocks are up more than they are down over any 1-year time frame. Saying “the market will be positive” is a higher probability guess than saying it will fall. 

When it comes to outlooks about the economy or the market, what I want you to focus on is not the guess about market direction or performance, but how that person thinks about the World. What is their framework and how adaptable are they to change? 

My framework for 2020 was that growth was slowing, but jobs and consumer balance sheets were still supportive of the market. Jobs got nuked in the pandemic, as did the market, but balance sheets were one of the bright spots due to the CARES Act and low rates. When the pandemic hit, I shifted gears to analyzing how the consumer was acting because that’s what the market would focus on.

Remember, you don’t need to know where the market or the economy is going to be a successful investor, that is not a prerequisite for making money. The absolute BEST investors are betting on the long run not the short run, they acknowledge that the World and the economy fall apart from time to time but that doesn’t preclude them from compounding their wealth. 

So how am I thinking about 2021 and beyond? Here is my framework:

How do I think the market will do? Here is my framework:

Dear reader, the kind of stuff that TRULY moves markets, the shocks that represent a real risk to your money, will never be seen in advance. If you are reading about a “worry” in the media, on a blog, or on TWTR, the market knows about it. If you are forwarding an email to your advisor saying “what about this” the market knows about it.

For as much as we talked about the “Trade War” with China how insignificant does that seem now? How about election worries, how did those go? I’d argue in the past 20 years there were only 3 events that posed an outsized risk to your money: 9/11, The GFC, and COVID19. How many of those were on the top of the markets mind when they happened? You get my point.

2021 will be another year on our journey full of ups and downs, success and failure, high points and low points, joy and sorrow. Will there be winners and losers this year? Yep. Will there be exciting sectors and names to invest in? Absolutely, and Baird advisors will help their clients do just that, but 2020 should’ve taught you that having a plan and sticking to it is the most important thing you can do.

Make this the year you commit yourself to being a long-term investor and as my friend Morgan Housel said, stop asking yourself the question “what happens next” and start asking yourself the question “how long can I stay invested for?” 

Being Thankful

I know it’s en vogue to call 2020 the “worst year ever,” and to count down the days until it’s over, but we are approaching one of my absolute favorite holidays, Thanksgiving. As a child I couldn’t wait until Thanksgiving because I got to see family members who lived across the country, eat as much stuffing as possible, then lay on a couch and watch the Detroit Lions get beat like they do every year. I know this one will look and feel different but that doesn’t change that fact that it’s an amazing holiday.  

I wanted to use this space to say what I’m thankful for in the midst of such a tumultuous period. Instead of the usual stuff like family, friends, and the fermentation of crushed grapes, I want to focus on the little things that so often go overlooked. Things like..

  1. Walks.  I’ve never been one for walking other than, you know, to get places. When the stress of 2020 weighed me down I found that a walk would bring me back to a better state of mind.  
  2. Patience, especially in investing. Patience is hard to come by, and I’m saying that as a parent of teenagers. Without it we are prone to making rash decisions or to sabotage ourselves. My friend Ben Carlson said in his latest blog post "Sitting on your hands and not panicking, even when stocks are down big, remains one of the best investment strategies on the planet." The absolute BEST investing strategy in 2020 was simply patience, I’m grateful for re-learning it.
  3. Creativity in othersOne of the ultimate gifts someone can bestow upon the World is to create art. Whether it’s a painting, or a song, or the written word, art makes our lives deeper and richer. Books can transport us to different Worlds, songs can inspire us, and TV shows like “The Queens Gambit” can lift our spirits in trying times.
  4. My neighborhood. You know what matters more than the city you live in? The neighborhood you live in. 2020 taught me that it better be good because that tiny piece of land (and the people who live in it) can become your entire World.
  5. Two ply toilet paper. Because we spent a month using one ply…
  6. Teammates who can adapt quickly. In one week in March my entire team learned how to operate out of our homes while ramping up our creativity and impact to clients. Work is a joy when your teammates are not only adaptable but remain in good spirits along the way.
  7.  A good webcam and microphone. Guess what, we’re probably not going back to previous levels of business travel. Learning how to communicate with clients, the media, or your teammates via online platforms is now a part of your skillset so make sure you look and sound professional.
  8. Science. We may have just created the first mRNA vaccine in human history and we did it in under a year. I cannot fathom what that means for future pandemics or for how we approach other diseases like cancer. As Morgan Housel says “We have no idea what happens next
  9. New friends. There are people I talk to everyday that I have never met in real life. I talk to them about the market, family, life, and I can’t wait to finally meet them because they helped me get through 2020.
  10. A market crash. Look, I know this sounds really weird, and living through March of this year was one of the worst moments in my professional life, but I am thankful it happened because it taught me a lot about the market, investors, and how to approach my job. You can’t learn the wisdom of markets without living through moments like March, you can’t really say if you’ll panic with your money until you’ve had your feet held to the fire, and you can’t learn to live with fear until you’ve felt it deep inside your mind.

Bonus: Lingering in small momentsYou are trying to balance a career, your family, and all the stress of a modern life, but lingering in small moments was everything this year. Reading to your child, a zoom with Grandma, that first sip of coffee, you know when the small moment is happening because you never want it to end.

I know we are still going through a very difficult moment. There has been a tremendous loss of life, jobs, mental health, and youth, but as we approach the end of this year, and look optimistically to a new one, don’t forget to remember the things you are thankful for and to hold close those who matter the most in your life.