In June of this year, as the world was still reeling from the aftermath of the COVID-19 crash in the stock market, a Wall Street journal article entitled: “The Ticker Symbol We Need Right Now: FOMO” focused on an investment strategy I have been discussing for some time Readers know that FOMO means “Fear of Missing Out”, and it is generally well established that there are fewer painful experiences than seeing your neighbors get rich doing stupid things. To paraphrase a famous proverb – “first you try to reason with them, then you try to convince them, and finally, you just join them.”
For my own portfolio, I am glad that my experience from prior tech bull markets has taught me not to fight momentum and collective behavior of individual investors who extrapolate most recent experience. As brilliantly discussed in a recent article by Andy Lo and his colleagues in the Journal of Investment Management, this behavior transcends geographies, and if I may add, transcends education, training and expertise.
The behavior emanates from perceptions of risk. To get on a bandwagon appears less risky, and individuals in aggregate are much more risk-averse than institutions. I may also add that the biggest skeptics of momentum-driven markets are academics, who, to use the quote above and my own experience, after all reason is exhausted, are actually more prone to buying close to the top, and selling at the lows. When it comes to the stock market, it is sage advice to leave your smarts at the door.
Central Banks continue to flood the markets with cheap money, and have decided to completely ignore asset price inflation. We have had a massive IPO year, with smart stock owners parting with equity for funny money cash. SPACs are everywhere. Modern Money Theory and the lack of goods and services inflation means that there is no remaining barrier to money printing and Central Bank Bond buying.
Historically, there are times to own assets, there are times to own cash, there are times to lend, and there are times to borrow. Right now, with global yields stuck at zero, and whether or not your personal philosophy and experience allows, it is time to borrow, lever and buy assets. Yes, it is very dangerous given stratospheric valuation, so it has to be done with built-in asymmetry and protection. As I have discussed in previous work, one way to do this is via call options on the stock market. Call options provide a neat little package of leverage, asymmetry, and FOMO without losing your shirt if markets tank. (Note: Options involve risks and are not suitable for all investors. There are many factors that an investor should be aware of when trading options including interest rates, volatility, stock splits, stock dividends, stock distributions, currency exchange rates, etc. Investors should only engage in options trading that is best suited to their financial condition and option experience and which considers current market conditions. Investing in options may increase volatility and/or transaction expenses. An option may expire without value, resulting in a loss of an initial investment and may be less liquid and more volatile than an investment in an underlying security. only to the purchase of options but not to the holding of the options themselves.)
And yes, I also know all good things come to an end, and when this one ends it won’t be pretty either. Until then, don’t be shocked to see even more incredible performance by risk assets and your neighbor’s portfolio. And when, despite all commonsense this strategy still works, I give you permission to sing my Ode to FOMO:
You told me to save my money
Put it in a pot and watch it like honey
But when I opened the pot
Relatively speaking there wasn’t a whole lot
I should not have listened to you
So clear you did not have a clue
I should have done what my neighbor did
Throw caution to the wind and throw in a bid
You made fun of the day trader
You said it will be different later
Like a fool I listened and got stuck in slo mo
Now I am so much happier with FOMO
I know you will be right in the end
You tell me not to borrow and not to lend
But I won’t listen anymore to your no no
I think I will buy some call options and just FOMO
(Copyright: Vineer Bhansali, ASCAP)