I’ve been hit with one of the greatest fears in managing money lately. It’s called FOMO, or “fear of missing out.” And if you pay attention to financial news, you may be experiencing this too.
Let me start with Bitcoin. I’ve studied it, but never tried to invest. I’ve got some friends that have been in this digital currency for some time. I’m thrilled that they have been wildly successful.
But you know how awkward you feel when somebody tells an inside joke that you don’t get? Similarly, it is a lonely feeling missing a big opportunity when those around you are experiencing a phenomenal rise in wealth.
I pulled up a chart as I’m typing this which shows in the last 52 weeks Bitcoin surged from $3,925 to $41,933. An increase of 968%. Wow! Congratulations to all of you that are invested.
Or, take a look at Tesla. I heard Elon Musk talk a few years ago and knew he was capable of great things. But I never saw the potential in Tesla. They don’t make any money. And yet, Tesla is up almost 1,100% in the last twelve months! Elon is now the richest man in the world.
A young man recently published his results on social media showing his initial Tesla investment in 2013 had grown by over 100 times. He is now worth almost $12,000,000 at age 39. And does he plan to sell? No, he is thinking about borrowing on this nest egg so he can buy more!
How should we think about these events and our money? Having lived through a lot of different market cycles I have six suggestions.
First, we need to be comfortable with who we are and what our goals are. I love entrepreneurs and the risks they take. But I have a confession to make. I never wanted to work 80 hours a week like many of them do. I love a balanced life that allows me to be home most nights by 5:00. And I don’t like concentrating my assets in one or two stocks because I like to sleep at night.
I’m thankful that the world has risk takers like Elon Musk. The one thing I remember from his talk was, to use a poker term, that he had to be “all in.” He had leveraged himself to where he didn’t have any more borrowing capacity. To be less than “all in” might lead him to lose focus. I love that he’s like that. But I am comfortable that I am not wired that way.
Second, obsessing over someone else’s success takes the joy out of our own success. My 401(k) earned 17% last year. I’m thrilled. But if I focus on what I could’ve done in Tesla, I’d lose the joy of a fantastic year in the middle of a pandemic.
Third, we all have a circle of competence that gives us an edge over others. When we figure out what our edge is, we should invest heavily in it rather than try to imitate someone else.
Our careers, for example, are our greatest earning asset. There is usually no greater return on investment than to add to our skill set and make ourselves more valuable to others.
In investing, it is the same principle. I know banking. I have invested in bank stocks in the past and done reasonably well because I know the risks. I can make a decent estimate of when those stocks are undervalued.
On the other hand, I learned the hard way in the late 90’s that I know nothing about technology stocks. Trying to pick the winners in internet stocks was folly. I kept the records of my losses to remind me to stay in my circle of competence.
Fourth, we need to temper our confidence in predicting the future from the history of manias. I have no idea if Bitcoin is going to $500,000 as some predict. Or will it go to $0 as others forecast? Nobody knows if history is any guide.
There have been a number of notable bubbles popped in my investing life. When I studied for an MBA in the 80’s, I studied Japanese business methods because they were crushing it. Then they hit a wall and their stock market collapsed in the 1990’s. The Nikkei hit an all time high in 1989 of 38,915 and today trades at 28,698. Thirty-two years later, it is still 26% below its 1989 peak. That’s what a bubble popping can sound like!
And more recently, the real estate bubble in the US that popped in 2008 was not seen by even the elite economists at the Federal Reserve.
But, on the other hand, I thought Amazon was a bubble in 2013. It was trading at nose bleed levels and was not making any money or predicted to make a profit anytime soon. Today it is 1,000% higher. That’s why I find investing a good teacher of the virtue of humility!
Fifth, if you’re a conservative, diversified investor like me, but have a latent risk taker buried within you, I suggest taking some modest positions to scratch that itch. My Bitcoin friends are convinced the rally is just starting. As I see our currency being debased with so much deficit spending, the outrageous predictions of Bitcoin going to $500,000 seem plausible. I might be tempted to get in if it dips. But assuming I decide to get in, the next question is how much?
My rule of thumb is allocating 2% of my net worth for speculative investments when I really feel like I have Warren Buffett’s insight on something. You might want to go higher for these types of investments depending on your circumstances. But allocating a small percentage of your net worth is a reasonable way to get into the game without jeopardizing long-term goals. But it will never make you as rich as Elon Musk.
And finally, if you believe in a diversified portfolio in low-cost index funds like me, take comfort that you do own Tesla and other high flyers that are publicly traded. How else did I earn 17% on my retirement funds? Only by owning a piece of everything.
I would love to hear from you how you are managing your own FOMO. And if you’ve been in Bitcoin and Tesla, congratulations!
Joe Kesler
I recently invested in a hospitality company, based mostly on my knowledge of the competence of the founder. He’s not Elon Musk but he has a proven track record and he has a good measure of entrepreneurial drive. So I invested in his company…. a few months before the pandemic hit and the whole business plan was superseded by events. Am I an idiot? Well, I knew there was some risk and I had limited my investment in accordance with your point 5. Should I cut & run? Well, I could get my money back – but I had also invested to show support for my friend’s work. And the silver lining is that commercial real estate prices are depressed now and he sees this as an opportunity to position the business to take advantage of the recovery. If there is a recovery.
I had a boss once who took advantage of employee purchase plans to buy stock in the company. Then the company tanked because of managerial issues at the highest level, and nobody at our level saw it coming. He found himself out of a job and with a worthless investment as well. I think he was operating out of FOMO, he thought he had an inside track to a nice profit. Fortunately, he had some core competences, and he moved away to another job for a similar company where he did well.
The most careful single investment is no protection against events that hit out of left field. Think about Boeing, a company that had great products and a big order book, and the only risk was whether they could get to filling all those orders. And then came the 737 Max, followed by the pandemic. Now they are in survival mode. Share price: It was $440 in March of 2019. $100 a year later. But today, $200. The $100 – $200 rise is inexplicable to me. Perhaps a rising tide floats all boats.
Great comments Steve! Sounds like a measured approach you take to investing with eyes wide open to the risks you are taking. Boeing is a great example of a stock that the “experts” were all recommending before it crashed. Thanks for the good example. I hope your hospitality company comes roaring back and you have a Tesla like return on investment!