My end of year letter usually has a key word to denote the theme of my message. This year, it is an acronym. “Foe-Moe” is a new term that has evolved from various social media sites. For those who don’t know, FOMO stands for Fear Of Missing Out. It is extremely relevant and, while not having a label before, has existed forever. It is this fear that often causes people to make quick, rash decisions. It’s this fear that, in my opinion, causes impulsivity and takes away the ability for people to stop, step back and think rationally about situations. I’m sure by now you can guess that I see and hear it occurring often when it comes to investing. It is only human nature that when one hears of someone getting a 200% return from a stock that you’d want to jump in and invest in that stock. If everyone is making that “easy” money you exhibit FOMO. Think back to the days of Nortel, as an example.
I think because of my experience with investing and seeing the errors that people make with letting that influence their decisions, I have maybe become aware of the perils of what FOMO can cause.
As many of you know, I tend to be a contrarian.
I think that learning to step back, assess the situation, research the facts and resist the draw of FOMO makes me a better portfolio manager. Don’t get me wrong, I, too, have lined up for the “best” hamburger, because I didn’t want to miss out on the opportunity of eating one. But later in life I have realized that if the hamburger place is that good, it will stay in business and I don’t have to line up to get one of the first ones. Maybe it’s my age and lack of interest to spend my time waiting in line.
What does all of this have to do with the markets? For the past five to eight years, most of the portfolios I manage have evolved to have a high percentage of exposure to the equity markets. I’m talking about 80% or more in the stock market. This has been necessary, in my opinion, because during this time period of historically low interest rates, fixed income or bond yields have paid roughly less than 2%. Since 2% is the target inflation rate set by the Bank of Canada, any investment that pays less than that means that, effectively, we are losing money, or at least the buying power of that money. Therefore, out of necessity I have had no choice but to look to the equity markets for yields above 2%.
Now, I see things differently, not because we are going to see an increase in interest rates to 5-6%, but because indicators have started to point towards the economy going into a recession. Recessions imply lower growth rates, higher unemployment, reduced consumer spending and an overall slowdown of the economy. Everyone is focused on whether or not we are truly in a recession or not. The problem with that is the definition of a recession is “two negative quarters of GDP growth.” This means that we would have to have already experienced six months of negative growth before it is officially called a “Recession”. By that time, it is more difficult to react in an already negative environment.
key is to be preventative. I have already been taking action the past several months by working on reducing overall equity exposure. As I write this letter the markets are reaching new highs. That would cause most people to think, “Why should I sell stocks when the markets are still rising? I don’t want to miss out!” answer to that is to be preventative and be pro-active. If the market has a correction to the tune of -30% and you have 80% of your portfolio in the market, your portfolio could have a drop of 24%. re are some liberties I have made here, in terms of assuming holdings are directly correlated to the market, but you get my general idea.
So as much as I understand that people want to be fully invested, as there are always exceptions to the rule, this is one of the times. We have to learn to let go of that FOMO and be logical. It never hurts to take a profit and we can’t lose cash. The major element that I cannot forecast is when is this all going to happen? I will say that despite some market pundits saying, “This time it’s different”, often it is not.