Tag Archives: FOMO

TIARA: There Is a Real Alternative

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Designed Wealth Management

By John De Goey, CFP, CIM

Special to the Financial Independence Hub

By now, you’ve likely heard the term FOMO: the Fear of Missing Out.  You’ve likely also heard the term TINA: There Is No Alternative.

Taken together, these handy little pop culture acronyms explain a good deal of what has gone on in capital markets over the past three years or so. I’d like to take this opportunity to push back a little on the second one.  Based on current valuations, there may not be a sensible alternative to stocks, bonds, and real estate, but there may well be an alternative in …. wait for it…. alternatives.

Alternative assets are varied and the term ‘alternative’ could mean different things to different people. The asset class is known on a non-correlated basis by offering opportunities in such varied assets as infrastructure, liquid alternatives, structured notes, and hedge funds.  While I personally dislike the last option due to high fees, illiquidity, and opaque reporting, depending on client objectives and risk tolerance, I believe there’s often a strong case that can be made for adding alternatives to your portfolio.  As such, here’s a new term: TIARA. It stands for: There Is A Real Alternative.  You’re not stuck with having to only choose between some combination of stocks and bonds. [Editor’s Note: John De Goey coined this term.]

A third major Asset Class

In the past half decade or so, many more traditional asset allocation strategies have changed significantly as bond yields have declined.   The asset class that has been gaining the most traction is alternatives. Continue Reading…

Timeless Financial Tips #4: How to Manage your Financial Behavioural Biases

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Lowrie Financial: Canva Custom Creation

By Steve Lowrie, CFA

Special to Financial Independence Hub

There are countless external forces influencing your investment outcomes: taxes, market mood swings, breaking news, etc., etc.

Today, let’s look inward, to an equally important influence: your own financial behavioural biases.

The Dark Side of Financial Behavioural Bias

Having evolved over millennia to secure our survival, our deep-seated behavioural biases precondition us to frequently depend more on “gut feel” than rational reflection. Sometimes, our instincts are life-saving, like when a car brakes hard right in front of you. Chemical reactions in the lower brain’s amygdala trigger you to brake too, even as your higher brain is still enjoying the scenery.

Unfortunately, these same rapid-fire triggers often hurt us as investors. When we make snap financial decisions that “feel” right but are rationally wrong, we tend to sabotage our own best interests. By recognizing these reactions as they occur, you’re more likely to stop them from ruining your financial resolve, which in turn improves your odds for better outcomes. Let’s explore some behavioural finance examples that you’ll want to prepare for…

Behavioural Finance Example #1: Fear and FOMO

The point of investing is to buy low and sell high. So, why do so many investors so often do the opposite? You can blame fear, as well as Fear of Missing Out (FOMO investing). Time after time, crisis after crisis, bubble after bubble, investors rush to buy high by chasing hot holdings. They hurry to sell low, fleeing falling prices. They’re letting their behavioural biases overcome their rational resolve.

Behavioural Finance Example #2: Choice Overload and Decision Fatigue

Our brains also don’t deal well with too much information. When we experience information overload, we may stop even trying to be thoughtful, and surrender to our biases. We’ll end up favouring whatever’s most familiar, most recently outperforming, or least scary right now. When choosing from an oversized restaurant menu, that’s okay. But your life savings deserve better than that.

Behavioural Finance Example #3: Popular Demand and Survival of the Fittest

Inherently tribal by nature, we humans are susceptible to herd mentality. When everyone else gets excited and starts chasing fads, whether it is cryptocurrencies, alternative investments, or the other financial exotica-du-jour, we want to pile in too. When the herd turns tail, we want to rush after them. It’s like that old joke about escaping a bear: you don’t need to run faster than the bear; you just need to run faster than the guy next to you. In bear markets, this causes investors to flee otherwise sound positions, selling low, and paying dearly for “safer” holdings, rather than holding their well-planned ground.

Behavioural Finance Example #4: Anchor Points and Other Financial Regrets

Successful investors look past their occasional setbacks and remain focused on capturing the market’s long-term expected returns. But that’s hard to do, as we are often trapped by financial decisions regret. For example, loss aversion causes the average investor to regret losing money approximately twice as much as they appreciate gaining it. Similarly, anchor bias causes us to cling to depreciated holdings long after they no longer make sense in our portfolio, hoping against hope they’ll eventually recover to some arbitrary, past price. Ironically, you’re less likely to achieve your personal financial goals if you’re driven more by your financial regrets than your willpower.

Taking Charge of Your Financial Behavioural Biases

We’ve now looked at some of the damage done by behavioural biases. Once you know they’re there, you can at least minimize your exposure to them. Better yet, by using what behavioral psychologists call “nudges,” you can even harness your biases as forces for financial good. Following are two examples. Continue Reading…

Behavioural Finance: We have met the Enemy and it is Us

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By Noah Solomon

Special to the Financial Independence Hub

Behavioural finance is the study of the influence of psychology on the behaviour of investors. Its central theme is that investors are not always rational, have limits to their self-control, and are influenced by cognitive biases. People harbour a multitude of self-defeating behaviours that lead to self-defeating results.

In The Laws of Wealth: Psychology and the Secret to Investing Success, author Daniel Crosby states: “The fact that people are fallible is your biggest enduring advantage in the accumulation of greater wealth. The fact that you are just as fallible is the biggest impediment to that very same goal.”

Confirmation Bias: Letting the Tail wag the Dog

Confirmation bias is the tendency of people to pay close attention to information that confirms their beliefs and ignore information that contradicts it.

Most of us have a really bad habit of only paying attention to information that agrees with our existing beliefs. Our natural tendency is to listen to people who agree with us because it feels good to hear our opinions reflected to us. We also tend to let the proverbial tail wag the dog: to draw conclusions before objectively weighing the facts. We first construct hypotheses, and then subsequently look for information that supports them.

Even some of the greatest investors have fallen prey to the confirmation bias trap. In December 2012, Bill Ackman, Chief Investment Officer of Pershing Square, launched a crusade against Herbalife, a nutritional supplements company, referring to the company as a pyramid scheme and stating that its stock was worthless. After taking a $1 billion short position in Herbalife, he continued to seek supporting evidence for his original hypothesis from Herbalife customers who had poor experiences with the company.

Activist investor Carl Icahn, who had an opposing view, acquired a 26% ownership stake in the company. The epic battle that ensued between two of Wall Street’s biggest titans resulted in a major loss for Ackman. Had Ackman attempted to find potential flaws in his thesis by seeking out customers who had positive Herbalife experiences, he might have either avoided or mitigated the losses which his fund suffered.

Loss Aversion/Disposition Effect: The Pain of Losses is (Myopically) larger than the Pleasure of Gains

Loss aversion does not describe the tendency of people to try and avoid losses, which is completely rational. Rather, it refers to having an economically unbalanced desire to avoid losses at the expense of foregoing commensurate or greater gains, which can cause them to win battles yet lose wars.

Loss aversion can cause investors to refrain from selling losing positions in the hope of making their money back, thereby allowing run of the mill losses to metastasise into “there goes my house” losses.  Loss aversion can also lead to significant opportunity costs, as money gets “trapped” in underperforming investments at the expense of foregoing better opportunities.

Closely related to loss aversion is the disposition effect, which refers to a cognitive bias that causes investors to sell winning positions prematurely and irrationally stick with losing positions. When a position is rising, we get anxious to lock in our gains and sell prematurely. At the same time, people are often too slow to cut their losses on holdings which are losing money and hold on to them in the hopes that they will recover. These behaviours tend to diminish gains and exaggerate losses, thereby leading to poor overall performance.

Fear of Missing Out: There’s nothing more annoying than watching your neighbour get rich

Fear of Missing Out (FOMO) refers to feelings of anxiety or insecurity over the possibility of missing out on an event or opportunity. What is most interesting is that FOMO is an emotional reaction that pushes us to trade or invest in a less disciplined way. Rather than buy stocks when they offer the most attractive risk-to-return ratio, investors are driven to buy them to an even greater degree the less attractive they look technically. Our fear of missing out becomes greater the more the market continues to act in an irrational way.

FOMO is frustrating because it occurs when the market is doing the unexpected and we are sticking to a solid plan. From 1996 to 2000, the NASDAQ stock index exploded from 1,058 to 4,131 points. Many of these technology stocks had little or no earnings yet still commanded steep prices. Investors feared that if they didn’t get in now they would miss out. Millionaires were minted overnight until it all went wrong. The dotcom bubble burst, and trillions of dollars of investor wealth vanished as the NASDAQ plunged to under 2,000 points by the end of 2001. Few did their due diligence on these hot tech stocks to make sure they were the best long-term investments for their personal portfolio and goals. It took many years for the average investor to recover.

In his characteristically folksy yet caustic manner, Warren Buffett used the following analogy to illustrate the absurdity of FOMO:

“Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behaviour akin to that of Cinderella at the ball. They know that overstaying the festivities will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem: They are dancing in a room in which the clocks have no hands.”

The Bandwagon Effect: Making sheep look like independent thinkers

The bandwagon effect describes the tendency of investors to gain comfort doing something simply because many other people are doing it. The tendency of people to prefer doing ill-advised things that others are doing rather than act rationally in isolation is best summarized by John Maynard Keynes:

“Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”

Whereas using the performance of others as a reference point for measuring your results mitigates the risk of underperforming your peers, it can expose you to severe losses. The widespread abandonment of reason and rationality associated with a herd mentality has historically resulted in speculative bubbles in which the crowd joins hands and runs off the cliff together. Continue Reading…

Bullshift Culprits 1 and 2: FOMO and TINA

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By John De Goey, CFP, CIM

Special to the Financial Independence Hub

Bullshift Culprit #1 FOMO (Fear of Missing Out)

For anyone who has been out of the loop, there are a number of acronyms and memes that have popped up over the past decade that help commentators to capture contemporary zeitgeist.  One of the most popular is FOMO – the Fear Of Missing Out.  The basic idea here is that other people are doing something (having fun, getting rich, cheating the tax man) that others want to get in on.

Getting in on things is all fine and well, provided they are legal.  Many aspects of FOMO are indeed legal and it should be obvious that there are social risks associated with wanting to do things that are not.  The thing to note is that there’s strong social pressure to participate – largely because there is some form of social proof that makes it seem as though everyone else is doing it, too (and getting away with it). If there’s one thing that upwardly-mobile people hate, it’s the notion that they are not ‘keeping up with the Joneses’ when they quite easily could be – if they only did whatever it was the Joneses are doing to give them the status / income / happiness edge they have in the first place.

Of all the possible examples of FOMO, getting rich by playing the stock market may well be the most insidious and the most common.  Anyone with seed money can do it.  No matter how rich or poor you are, if there’s a sense that you can make (say) an “easy 15%” on your money by investing in security X or product Y and that Betty and Bob in marketing both did it (and showed you their quarter end statements to prove it), the pull is often irresistible.  This can sometimes be fodder for something called “greater fool theory.”

Most real investors say “buy low; sell high,” but it needs to be noted that there is a segment of the population that makes money by using the principle of “buy higher; sell higher.” As long as there’s a ‘greater fool’ out there who is prepared to pay even more than the outrageous price you paid for something, you can make money by paying an outrageously high price to begin with.  This is a bit like a game of chicken or musical chairs.  At some point, the market runs out of ‘fools’.  In finance lingo, that’s when the bubble bursts. Continue Reading…

The Covid-19 Fight: Round 1 goes to Fear, Round 2 to FOMO

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Photo courtesy Pikrepo.com

By Noah Solomon

Special to the Financial Independence Hub

Round One goes to Fear

Prior to the COVID pandemic, it had been some time since investors felt anything close to the level of fear that gripped markets during the global financial crisis of 2008. As global stock indexes plunged over 30% from their late February 2020 peak in little more than four weeks, media pundits and investment managers were predicting Depression-era scenarios.

Round Two goes to Fear of Missing Out (FOMO)

Just as investors were fearing the worst, the cavalry (primarily in the form of the Federal Reserve and the US Treasury) saved the day, unleashing an unprecedented amount of both monetary and fiscal stimulus. These initiatives gave a strong boost to risk assets, which were deeply oversold on a short-term basis. As markets initially bounced off their late March lows, there were few optimists.

As stocks continue to climb to within striking distance of their pre-pandemic highs, many investors have not only become less fearful, but have embraced the notion that stocks have significant upside potential over the near to medium term. Refrains of “Don’t fight the Fed” and “Powell put” have gained increasing acceptance and have caused many market participants to shift from fear to FOMO.

For What It’s Worth (this has nothing to do with the way we manage money … but we can’t resist)

If it turns out the worst is indeed behind us, this would be the first bear market that put in its lows within five weeks of its pre-selloff peak. After the dot com bubble burst, it took the S&P 500 Index approximately two and a half years to finally hit bottom in October of 2002, at which point it had declined 47% from its March 2000 peak. During the global financial crisis, it took the index about one and a half years from its July 2007 peak to finally bottom out in March of 2009, by which time it had suffered a decline of about 55%.

To be clear, we are not insinuating that the massive monetary and fiscal responses that have occurred are irrelevant or that, all else being equal, they are not positive for markets. But the trillion-dollar question is whether they justify the stock market’s 45% gain from its late March lows (in the case of the S&P 500 Index) and the halving of high yield bond yields.

Without going into an exhaustive list of positives and negatives, it is probable that markets have over-discounted good news while under-weighting potential risks. In our view, at current levels the odds aren’t in investors’ favour. There is a distinct possibility that the mighty market brontosaurus has been bitten on the tail, but that the message has not yet reached its tiny brain. This is not to say that markets can’t creep higher, but merely that the probability distribution is unfavourable.

Einstein’s Definition of Insanity

Regardless of whether you think that markets are going higher or lower over the short, medium or long term, what is clear is that the current level of uncertainty is elevated if not extreme. Continue Reading…