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FOMO Will Make Investors FUBAR

FOMO or "Fear of Missing Out" seems to be driving a lot of money discussions these days.  Whether it's hoarding Bitcoin, multiple homebuyers making bids over asking price on houses, or day trading in "meme stocks" like GameStop and AMC it's clear that a mania is building in the minds of the general public.  When these manias end they will leave investors looking the same way they always do...FUBAR.  If you're not familiar with the term, ask your military friends.

Is there a mania in all investable vehicles?  No.  But wise investors should avoid clearly speculative items like Bitcoin and meme stocks.  This post offers background on manias, their causes and offers perspective on smart steps investors can take to protect themselves.

Manias Aren't New, They're Just Different Each Time

Charles P. Kindleberger in Manias, Panics and Crashes documents the long history of manias and factors contributing to their persistence.  Manias are not new, and they're not just in stocks:

What Where When
Tulip bulbs Dutch Republic 1636
Railroads United States 1857
Real estate Japan 1990
Dot com stocks United States 1999
Housing market United States 2008

H.L. Mencken famously defined puritanism as the “haunting fear that someone, somewhere, may be happy.” In a similar vein, today's financial media and Reddit pundits seem to be redefining investing as the “haunting fear that someone, somewhere, is getting rich quick while you sit there like a fool doing nothing.”  Don't fall for the hype.

Why is This Happening Now?

A number of factors are converging to help drive these mania(s):

  • Technology.  New tech like Robinhood and Coinbase make trading easy, even if it isn't necessarily inexpensive.
  • Gamification.  App designs can include colorful graphics, daily challenges, competing vs. friends and incentives for add-ons.  Most importantly, social media is deeply integrated into these platforms to further increase FOMO.
  • Online gambling.  The proliferation of online gambling, at first illegal but now becoming more widely legalized, is teaching investors bad habits around the thrill of fast money.  People used to joke about Wall Street being a big casino (even when it wasn't true), but small investors now hardly see the difference between sports betting and meme stock betting.  Whatever the thrill, it's certainly not investing.
  • COVID and its aftermath.  It's no coincidence that these investing manias are coming on the heels of COVID.  People were locked down at home, many not at work, they were bored and they were receiving government stimulus checks and lavish unemployment benefits.  It remains to be seen if the bad habits learned during COVID will persist as the world returns to normal.

So What's the Harm?

Promoters and fans of these mania-producing trends seem unaware of or unconcerned about consequences.  They see prices continually rising and figure they can easily sell any time they feel like it.  Even worse, some mania promoters and participants claim to not be in it for the money; instead, they believe they are on a mission to take down Wall Street fat cats.  Robinhood actually says "We’re on a mission to democratize finance for all." Oh, please.  Someone bring me an American flag and some apple pie.

That all sounds nice, but what happens when the mania comes crashing down?  Today's traders often are too young to know that not only do prices fall just as rapidly as they went up, but eventually there are no buyers at any price; the market has become illiquid.  What was a positive mania is now a negative panic.  You can't get your sell orders executed even at fire sale prices.  You're trapped, helpless.

Turns out, some of these mission-driven promoters aren't such nice people after all.  According to the Wall Street Journal "Robinhood Financial LLC has agreed to pay nearly $70 million to resolve sweeping regulatory allegations that the brokerage misled customers, approved ineligible traders for risky strategies and didn’t supervise technology that failed and locked millions out of trading."  This is a big deal when you consider Robinhood now has 18 million funded accounts with an average balance of $3,500, meaning these are all eligible for day trading.  Incredibly, six million of these accounts were opened in just the first two months of 2021!  Robinhood appears to be growing so fast and making so much money that forking over $70 million to pay fines is viewed as just the cost of doing business there.  Yikes.

And it's not just regulatory fines to worry about.  In at least one case, a 20 year old Robinhood customer killed himself in June 2020 after learning his account balance was negative $720,000 after options trading bets he made turned bad.  The losses were fueled by money lent to him by, you guessed it, Robinhood.  The poor kid didn't even have facial hair, but Robinhood lent him tens of thousands of dollars to place more bets at Robinhood?  Anyone see a conflict of interest here?  The kid's family sued Robinhood for wrongful death; Robinhood settled the case out of court for an undisclosed amount.

Despite the $70 million settlement and the dead young investor, Robinhood plans to list on the stock exchanges through an IPO sometime in 2021.  Why let fines and deaths get in the way of some fun day trading, right?

What Should Wise Investors Do During Manias?

In a word...nothing.

The brilliant Enlightenment philosopher Adam Smith in his The Theory of Moral Sentiments wrote brilliantly about this very point:

"Examine the record of history, recollect what has happened within the circle of your own experience, consider with attention what has been the conduct of almost all the great unfortunate, either in private of public life, whom you may have either read of, or heard of, or remember; and you will find that the misfortunes of by far the greater part of them have arisen from their not knowing when they were well, when it was proper for them to sit still and be contented." 

Avoiding manias is simple, really:

  1. Set long-term goals tied to things that really matter to you
  2. Create a written plan for achieving those goals
  3. Build a long-term portfolio tied to those long-term goals
  4. Revisit the plan and rebalance the portfolio annually, only changing the portfolio on the rare occasion in which your long-term goals change
  5. Ignore all the short-term financial noise; it will only serve to disrupt the achievement of your long-term goals

Tired of the Mania?  Talk to Oxford

When we build retiree portfolios at Oxford, we seek a balance between Stability and Growth following the principles outlined in our proprietary Power of 5 Investing system. Our goal is to help clients achieve long-term growth in their wealth, while managing through market downturns. Our system has been battle tested in 25+ years of market ups and downs and is ready to tackle whatever mania comes your way.

Interested in learning more?  Click the button below to get started:

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