FOMO – the fear of missing out, is a relatively recent term. Despite this it has long had an impact on normally rational investor’s decision making.
Permit me a recent example, away from the world of investing: our firm organised a syndicate for the EuroMillions draw, which stood at over £169 million*. This staggering prize had built up because no one had won the jackpot in numerous previous draws, with the average jackpot for EuroMillions draws being around £44 million.
For the uninitiated, myself included prior to this draw, winning the jackpot involves matching all 5 numbers (the balls numbering from 1-50) as well as both ‘lucky stars’ (these balls numbering 1-12). The odds of winning the top prize, according to the organisers, are around 1 in 140 million. The next biggest prize (all 5 balls but just 1 lucky star) is worth on average £310,000, but the odds are still pretty long, at around 1 in 7 million.
The cost of a single ticket is £2.50. What this means is that even accounting for the largest jackpot there has ever been (benefiting from previous weeks ticket buyers) you would, statistically speaking, need to spend almost £350 million on tickets in order to buy enough tickets to win the £169 million – though even then you are still trusting to chance!
In short, these aren’t great odds and yet rational people, who may not gamble normally, regularly buy tickets.
Our firm isn’t large (13 in total) and initially around 9 people said they would take part in the syndicate that was being organised. I wasn’t planning to take part but as the ‘what will you spend it on’ conversations started to circulate my FOMO kicked in – how could I live with myself if everyone in the office bar me became overnight multimillionaires? Ultimately, I did relent and I wasn’t alone, the FOMO eventually drove everyone to get involved.
Now this isn’t intended as an attack on lotteries – it’s a widely accepted form of gambling which as a by-product passes on around £30 million a week to good causes. There are however some parallels to be drawn with people’s investing habits.
The effect of FOMO can be found in people’s decision to invest. It can be difficult for people to see where the line between gambling and investing lies, particularly if there is a high degree of risk and complexity involved. People do sometimes invest (rather than gamble) purely for the thrill of seeing whether an investment goes up or down, so the decision to buy in such cases is primarily an emotional one.
Where I see FOMO as a particularly potent driver amongst normally rational and logical investors is the ‘mate down the pub’ conversation. Usually it involves someone the investor likes and respects telling them about an investment they’ve made and the gains/opportunity they expect as a result, some of which may have already materialised. This can sometimes result in the investor making the decision to follow suit and invest despite limited knowledge or not having done much in the way of research about the investment in question. FOMO is at play – they believe the ‘mate down the pub’ must have done some due diligence and made a sound investment decision, and so they follow suit as they don’t want to lose out.
This behaviour has contributed and helped to sustain (for a period) every investment bubble. The first major financial bubble was Tulipmania in the 17th century, when investors started purchasing tulip bulbs, leading to a huge increase in price. At its height the average price of a single flower was more than the average annual income of a skilled worker and indeed the value of some houses. This was followed by a dramatic collapse in 1637, just a year later.
A more recent example is the dotcom bubble, a rapid rise and spectacular collapse in the valuations of tech companies from the mid-1990s to 2000. In recent years we’ve seen the craze in a myriad of crypto currencies and whilst there is a huge amount of debate about the value these instruments the most widely known (bitcoin) saw a huge increase in 2017 before a sharp correction.
I, and many others, see huge potential in the technology associated with cryptocurrency and blockchain, but my point here is that many of the people buying the various crypto currencies have scant knowledge of what they are buying – the reason they are purchasing despite this is that they’ve heard about a rapid rise in price, often via social media, and don’t want to miss out.
Whilst investment decisions almost always have emotion attached to them, we rarely see this as being positive. Our investment philosophy as a firm is somewhat more deliberate, scientific and patient. It is based upon decades of academic research, focussed on investment factors that provide patient investors with higher returns over the long term, with evidence of such in the long term data on which the philosophy is based.
In case you were wondering, we didn’t hit the jackpot, the work lottery syndicate has finished and the associated FOMO considerably lessened, so I feel I can stop playing the lottery…
If you would like to know more about our investment philosophy drop me a line.
For more information, please contact Tom Shorland