You’ve probably watched this scene play out before. Two friends talking at a backyard barbecue, and one excitedly mentions to the other he just bought a stock that is expected to be the next Netflix. “But my investment advisor says you need to get in now or you’ll miss the opportunity,” warns the friend. Not one to make rash decisions, the other friend holds off, choosing instead to watch the stock for a while to see how it does. He watches over the next five months as the stock soars, nearly doubling in value.
He reacts as many people would, with frustration, resentment, regret, and even self-pity, having missed out on the big score. He promises himself he won’t let that happen again. But, as with any emotional reaction in investing, that could be a costly mistake.
Fear of Loss, Fear of Missing Out – Same Psychosis but Different Market Cycles
What’s interesting to me, having watched the markets as an investment manager for 30 years, is how the fear of loss is transformed from one market cycle to the next. The fear of loss, as expressed in a market downturn as the fear of losing what you have, seems to mystically recast itself as the fear of losing out on an opportunity during sharp market advances.
Interestingly, both these psychoses stem from the same loss aversion trait inherent in investors, and both represent only perceptions of loss rather than the actual, permanent loss of capital. A loss in portfolio value is not actually a loss unless you sell your securities. In terms of lost opportunities, if you’re genuinely afraid of missing out on the next one, you are more likely to make a rash investment decision that could actually result in the permanent loss of capital.
2020 was a Banner Year for Missed Opportunities
Reflecting on the events of five years ago, 2020 stands out as a remarkable period of missed investment opportunities. The psychological phenomenon of "fear of missing out" (FOMO) was particularly pronounced among individual stocks, especially the renowned FAANG group - Facebook (now Meta), Amazon, Apple, Netflix, and Google - alongside Tesla, which experienced unprecedented growth during that year.
Tesla's stock performance in 2020 was nothing short of extraordinary. The company's shares soared by approximately 743% over the course of the year, elevating its market capitalization to around $669 billion, surpassing the combined value of the three largest U.S. automakers at that time. This meteoric rise led many investors to speculate just how much higher Tesla's stock could climb.
Similarly, Apple achieved a historic milestone in 2020 by becoming the first company to reach a $2 trillion valuation, a mere two years after hitting the $1 trillion mark. This rapid ascent undoubtedly fueled investors' desires not to miss out on further gains. Notably, even seasoned investment managers felt compelled to hold Apple stocks, sometimes against their better judgment, simply because of its soaring performance. This scenario underscores the importance of having clear investment rationales beyond mere market momentum.
Personally, I've experienced the repercussions of FOMO in my investment journey. Take Netflix, for instance. After securing a 400% annualized gain, I decided to sell my shares, only to watch the stock appreciate by an additional 4,000% thereafter. A similar situation occurred with Tesla when its shares were trading at $230. Despite thorough analysis and consideration, I chose to step away, and subsequently observed the stock's substantial rise.
These experiences highlight the challenges investors face when balancing rational decision-making with the allure of potential profits. They serve as reminders of the importance of adhering to sound investment principles, even in the face of market exuberance.
With a Sound Investment Strategy, There’s No Such Thing as a Missed Opportunity
While I admit that those experiences were very humbling, I can also say without reservation that I couldn’t care less, and I say that for two reasons. First, why would we ever own a stock for which we couldn’t offer a rational explanation for owning it? We may miss out on a rare stock phenomenon, but we would rather focus on what we know. Then, if the stock underperforms, we would at least know the reasons why.
That leads me to the second reason. With more than 3,000 other companies in the U.S. and 20,000 worldwide, there are plenty of investment opportunities that are not at a point in the market where they are forming bubbles. A sound investment process isn’t limited to looking at one company as an opportunity; it looks at the entire market as an opportunity. With the ability to screen companies based on strict criteria, select the one or two with the greatest potential for growth over ten or twenty years, and then purchase them well below their intrinsic value, it’s a get rich slowly strategy, but with limited risk.
Written By Ted Kerr
Ted Kerr is the Founder and CEO of Touchstone Capital, Inc., overseeing $300 million in assets for over 450 households nationwide. He also founded Touchstone Cares, a nonprofit that has donated over $1 million to charities, including Transformando Vidas in Brazil. A Westminster College alumnus, Certified Financial Planner®, and author, Ted is a marathoner, pilot, and second-degree black belt in Taekwondo.