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.
Now, with the stock market flirting with new highs even amid a pandemic, there must be countless investors kicking themselves for fleeing the market on its way to the steepest (but most short-lived) bear market correction in history. Many watched from the sidelines in horror as the market recovered in record time and erased its losses. How many of them are feeling frustration, resentment, and regret?
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 26 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. As I wrote in a recent post (Focusing on Paper Losses Ignores Real Investing Risks), 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 a Banner Year for Missed Opportunities
The lost opportunity psychosis is even more acute when looking at individual stocks, especially the so-called FAANG (Facebook, Amazon, Apple, Netflix, and Google) stocks and their ilk. You can throw in Tesla because it’s been on a tear this year. Undeniably, Tesla has been making investors a lot of money this year, and, with the stock split, the company has laid a trap for investors suffering from the miss out-itis psychosis. With a market cap more than four times the combined market cap of all three of the largest U.S. car manufacturers, just how much higher do investors think Tesla’s stock will go?
This year Apple became the first $2 trillion company, less than two years after becoming the first trillion-dollar company. You can be sure there are many investors who don’t want to miss out on the third trillion. To my shock, that also includes professional investment managers. I know of one who said he couldn’t afford not to own Apple even though he really didn’t want to. He tied himself into knots trying to rationalize the investment, concluding that he would just have to manage the risk of owning it. I’m sorry but, if I can’t clearly explain why I would invest in a company, other than the stock is on fire, I would walk away.
I’ve been on the other side of this several times. There was the Netflix fiasco (Netflix, the Best and Worst Investment I Ever Made) when I sold the stock after a 400% annualized gain only to watch it gain another 4000%. We also looked closely at Tesla (Is Elon Musk’s Dream Becoming an Investor’s Nightmare?) when its shares were trading at $230. For the reasons I enumerated in that article as well as an article I wrote 16 months later (Is it Time to Eat Crow on Tesla?), after the stock gained 900%, we walked away from Tesla and never looked back.
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 a 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.
