2017 may now be well behind us, but the buzz over the trends set by the FAANGs (Facebook, Amazon, Apple, Netflix and Google), cryptocurrencies and marijuana stocks, lives on. And while we’re not here to speak to those topics directly, we’d like to address the fallibility of human behaviours and how this can markedly impact our investment decisions. However, before embarking on this potentially sensitive subject matter, we would like to emphasize that we are not stating an investment opinion on the aforementioned opportunities. Nor are we suggesting that one cannot make profitable trades in such sectors. Rather, we intend this article as a cautionary note.
We live in a world where smartphones enable us to log onto the internet or check our social media wherever we may be. Through this quick and easy access to information has emerged, the ‘fear of missing out’ (yes this is why teenagers are constantly checking their phones!) This sentiment, in fact, has become so prevalent in our culture that FOMO is now defined in the Urban Dictionary (hardly a robust literary resource, but an often useful indicator of cultural trends):
“a state of mental or emotional strain caused by the fear of missing out.”
Relating this phenomenon to the themes of last year, we continue to see a staggering inflow into many areas that we would suggest are fast becoming (if not already) overcrowded, perhaps in the unqualified hope that they may climb higher still. And while we are not against seeing momentum or trend lines as useful indicators, the tricky part lies in the timing of the trade. The saying ‘the trend is your friend until the end when it bends’ comes to mind. The crux of the matter: it’s important to not let hype or the fear of missing out provide impetus to our decision-making.
As a case study, let’s take a look at Amazon whose PE (the Price to Earnings Ratio being a stock’s cost per unit of Earnings) is 348.90. Compare this to the current PE of the US stock market at 25.82 (both as of March 13th.) So this company is 13 times more expensive than the average PE across the S&P500 index. To be sure, this could be justifiable in some investors’ eyes but for others, we have a hunch that we could be looking at a classic case of FOMO.
At Capstone, we value a corporation using numerous fundamental factors to determine an intrinsic value. We practice disciplined investing to ensure that our human emotions don’t cause us any behavioural bias. We believe in the uncompromised pursuit of value.
Please know that this article is not intended to dismiss or disrespect momentum or trend-following investors. Our goal here is merely to stimulate thought. We encourage investors to make investment decisions based on sound fundamentals while having both an entry and exit strategy in order to avoid becoming a victim of FOMO.