One of 2019’s most talked about documentaries on Netflix and Hulu is the Fyre Festival.
Fyre Festival’s premise featured celebrities and concert-goers mingling on Great Exuma, a private island in The Bahamas, all while lodging in fancy bungalows and exclusive yachts. However, attendees slept in hurricane relief tents, had limited access to food and water and no way of getting off the island.
Not surprisingly, Fyre Media, CEO, Billy McFarland, was convicted of fraud having swindled investors out of $26 million. What influenced both the investors behind the event and concert-goers to follow? A dose of Fear of Missing Out (FOMO).
With the eruption of social media, the proliferation of 24-hour news and marketing, FOMO is inescapable and has transformed our day-to-day lives. The Oxford English Dictionary added “FOMO” to its reference guide in 2013, dubbed as a Millennial lexicon, in addition to “twerk,” and “selfie”. FOMO is defined as the regret or anxiety of missing an exciting interaction, a profitable experience or other satisfying event.
FOMO perpetuates the fear of having made a wrong decision and increased thoughts of how things could be different. Sound familiar?
Bitcoin can be an example of FOMO. The cryptocurrency artificially rose to $20,000 from $900 during its historic run in 2017. As a Fiduciary, you will recall, our position on cryptocurrencies in their present form are not an investible asset class.
Talk-show host and writer, John Oliver elegantly quipped bitcoin is “everything you do not understand about money combined with everything you do not understand about technology.” Here are some statistics surrounding the meteoric rise and fall of bitcoin:
- Bitcoin’s estimated price was $3,400 as of February 2019. For investors who bought into the FOMO at bitcoin’s peak, this reflects an -83 percent loss of its initial value.
- Furthermore, for those who looked to access bitcoin by trading into the Bitcoin Investment Trust (Ticker: GBTC) during bitcoin’s rise in price, the premium-to-NAV was up to +50 percent (meaning, investors were willing to pay a premium of +50 percent over the underlying value of bitcoin in the trust).
FOMO can be analyzed through the lens of behavioral finance and DiMeo Schneider & Associates, L.L.C. shares a couple biases and how we manage those tendencies.
Recency Bias: Describes the phenomenon of thinking something is more likely to happen again, because it occurred in the recent past. Recency bias often manifests in terms of which way the market will move and how much momentum is behind it. One could conclude a rising market or stock will continue to go up or a declining market or stock will continue trailing.
How we address: A diversified portfolio means asset classes will trend and revert over time. Our asset allocation framework methodology helps us avoid reactionary measures to the short-term market moves and a disciplined way of rebalancing to strategic targets over time.
Herd Mentality: Investors may blindly follow the majority position or the ‘‘loudest’’ high-conviction idea. This is herd mentality. Often, the loudest idea is the absolute worst. Psychological studies show people have difficulty dissenting within a group. In a committee-driven investment process, groupthink can be damaging as we recognize such portfolios tend to have poor risk controls and diversification.
How we address: Within our Investment Committee, when a money manager is approved for client portfolios, we have conviction in the manager that she/he can stomach the inevitable performance lulls. We do not gravitate to the “hottest” manager in the midst of a winning streak because we know how perilous that can be. Our Investment Committee learns each manager’s strategy and process to anticipate the market environments when performance will be in and out-of-favor.
Furthermore, for hypothetical purposes, say there is consensus approval for a manager, our Operational Risk Committee has veto power to turn down any investment idea whose due diligence doesn’t hold water.
While FOMO continues to drive our investment, social and personal behavior from an investment standpoint, it is important to balance the logic-driven tenets of Modern Portfolio Theory with the irrational tendencies of human beings.
After all, we are not robots driven by pure logic and boundless rationality. Harry Markowitz, the father of Modern Portfolio Theory, said in describing his own investment strategy, ‘‘I should have computed the historical covariances of the asset classes and drawn an efficient frontier. Instead, I visualized my grief if the stock market went way up and I wasn’t in it—or if it went way down and I was completely in it. My intention was to minimize my future regret. So I split my contributions fifty-fifty between bonds and equities.’’ And so, if the father of Modern Portfolio Theory experienced FOMO, we should all take heed and proceed with a little caution.
For more information please contact any of the professionals at DiMeo Schneider & Associates, L.L.C.
