With
the precedent example of an artist becoming a millionaire, a large influx of investors
were lead into the stock market, making them be frenzy into buying Facebook stocks. In this
blog, I am not talking about Facebook, I'm talking about these irrational
investors.
Investors were seeking for riskier assets with high
return. There is a phrase called ‘There Is No Alternative (TINA)’ which implies
that investors have no choice but to buy higher yields than the bank deposits. Mostly it applies to the stock or high-yield corporate bond market, since the
stance of FED was super dovish (central banks all around the world are also holding interest rate low) and FFR remained permanently near-zero. (Mainly stocks are the main target from investors because it is very sensitive to the news. Most news are positive to allure investors to get in to the field.)
However,
the market seemed to have shrunk for a while when the COVID-19 crisis broke
out, but the combination of the FED's monetary policy and the Treasury's fiscal
policy revived the asset price and market significantly.
Shares
of Blackrock has risen sharply for profit rise amid economic downturn during
COVID-19. It surely means that investors are now looking for ETFs to buy stocks
passively and indirectly, since they are looking for higher returns. Please see
my blog about Blackrock’s profit rise.
The term FOMO (Fear Of Missing Out) becomes talk of the town again when the investors are worried to miss the rallies that are ascending fiercely. The phenomenon first came out 1996 by marketing strategist Dr. Dan Herman, who conducted research for Adam Bellouch and published the first academic paper on the topic in 2000 in The Journal of Brand Management. (Wikipedia) Later the term 'FOMO' was coined by Author Patrick J. McGinnis let the world know the phrase in a 2004 op-ed in The Harbus, the magazine of Harvard Business School. The term FOMO was first applied as marketing term, "Don't be left behind by trend or fad".
Later the term FOMO is also seen in article or opinion section of stock market explaining the phenomenon about investors seeking for the assets that others are looking for. Paul Krugman used it later in stock market. The term implicates similarly with examples below. (quotation from Wikipedia and Cycling Tips)
Herd Behavior: The behavior of individuals in a group acting collectively without centralized direction. Herd behavior occurs in animals in herds, packs, bird flocks, fish schools and so on, as well as in humans. Demonstrations, riots, general strikes, sporting events, religious gatherings, everyday decision-making, judgement and opinion-forming, are all forms of human based herd behavior. [Wiki Quote]
Lemmings: are small rodents that have been known to follow each other as they charge to their deaths off the edge of cliffs. [Cycling Tips Quote]
Mostly the procedure of FOMO phenomenon (also called behavior) about stock market starts from cognitive bias where people are to follow the crowd, animal spirits to be part of them, participate in the fierce rally and finally lead to irrational exuberance. FOMO causes most of the bubbles and the crash incidents.
The bubbles were also existed in the ancient financial market. In ancient Babylon, commodity prices such as barley and wool took sudden leaps and fall which can't be explained whether the bubble formed due to the weather or the war. However, it is surely clarified that irrational buying and selling shaping the bubble.
In 1720, shares in the South Sea Co. and 88 of other leading stocks skyrocketed all-time highs as speculative investors to chase instant market gains. (The South Sea Co. roared 650%, Royal Exchange Assurance surged 1,243%, London Assurance created 4,220% incline) They had the story which can upend their stocks such as "trade in hair", "import a number of large jack-asses from Spain", and develop an "air pump for the brain". These stories look very unspecified and could be in vain, however, the media spread the market gossip through newspapers. South Sea was "all the talk and fashion" in London. King Goerge I, half the members of Parliament, genius Newton, the poet Alexander Pope were eager to be in a group of popular companies' shareholders. However, those companies took sudden leaps and fall, crashing down between 81% and 96% off the peak.
Nifty Fifty is also the example of the bubble collapse during 1960s when blue-chip companies were trusted by absolute public confidence. The 50 companies included IBM, Coca-Cola, GE, McDonald's, Disney, Xerox etc. Investors were fenzy about them, believing there is no such high price and could afford to take in account whenever risk might occur. They were absolutely sure they could thoroughly earn the profits. The average p/e ratio was formed from 80 to 90, which was sold in 8 to 9 later in 1973. The investor learned the lesson; FOMO will never happen again.
However, when the economy is growing and lays positive mindsets to investors, things happen again. Mass media only carries good news and the stock markets surges. In 1990s, an idea that internet will change the world was slogan of investors, considering there is no such high price of e-commerce and dotcom companies. Stocks were traded not regarding to the p/e ratio. Most of transactions were based on the growth of sales or the visitors of the websites which was standard on estimating the price. The craze has reached the realm of bubbles, and investors have finally conceded defeat as they cannot resist the frenzy called 'dotcom bubble'.
Financial crisis 2007-2009 was formed with the belief that the house price will never fall. In fact, there were only three cases when nominal national housing price Index fell until 1997. Twice fell by about 1%, and once by 2.8%. Thus, the decline in the national real estate price index has never been close to 20 percent after the World War II. Banks or financial institutions lent money to the house seekers by issuing subprime mortgages without the lender's minimum proof of income or evidence of employment. Later these mortgages where combined together with other different grades such as prime or lower. These were trenched into new derivatives or complicated funds; most recognized one is CDO. FED lowered FFR to promote housing markets. Regulators eased the Glass-Stigull Act, which led to three times more leverage, and strengthen uptick-rule to prevent downward bets from short forces. Investors were in FOMO phenomenon; they did not want to miss the rally of house market. Due to the rise in CPI, FED could raise interest rate gradually since there was no sign of dollar being stronger. Decline in borrowers made the housing market weaker. Assets related to the market gradually was bear steepening making investors in panic to sell whatever they have, crying to save them from danger.
These were not limited to the examples above but also happened in Japan after Plaza-accord, Taiwan, China (IPO bubble). In January 2018, U.S stocks soar due to tax-cut by Trump administration, which made fall in February. Bitcoin bubble took place in the same year. The investors think this time is different as they regard the event as special case.
I did not find the bubble until 2019 (may be corporate bonds due to the little yield spread between corporate bonds and treasuries with same maturity). However, COVID-19 has spread all around the world making the countries in lock-down. The decline in supply and demand made the economy deteriorated. Nevertheless, assets have quickly recovered due to the fast response from FED and U.S Treasuries. I can see some of the specific stocks and assets that seems to form a shape of bubble such as electric vehicle and semi-conductor companies, commodities such as gold, bonds, and so on in near days. (Kodak is one of them) May be monetary and fiscal policy can help to change in investor's sentiment positively. However, the policy does not have much card to elevate the stocks in the future, if YCT or negative yield won't be proceeded. (Announcement
effect by future guidance won't be a strategy next time)
I love Mark Twain's quote: History doesn't repeat itself, but it rhymes. Howard Marks have repetitively emphasized the market cycle. Positive events amplify investors' risk-taking tendencies, but when the turmoil arrives, they rush to sell, even though it's a low-cost buying opportunity. According to the article of Jason Zweig, behavior of FOMO and bubble is not a bad thing; it is about human nature.
In conclusion, the winner and the loser in the investment field is determined of how they restrain their instinct and have second-order thinking. This is they way to let our portfolio outperform in the market. There is a word I really love from a janitor (Mr.Read) who made 8 million dollars from small amount of money for 65 years. "Investing is not IQ test, it is test of character". Never be a part of a group of FOMO behavior.
The bubbles were also existed in the ancient financial market. In ancient Babylon, commodity prices such as barley and wool took sudden leaps and fall which can't be explained whether the bubble formed due to the weather or the war. However, it is surely clarified that irrational buying and selling shaping the bubble.
In 1720, shares in the South Sea Co. and 88 of other leading stocks skyrocketed all-time highs as speculative investors to chase instant market gains. (The South Sea Co. roared 650%, Royal Exchange Assurance surged 1,243%, London Assurance created 4,220% incline) They had the story which can upend their stocks such as "trade in hair", "import a number of large jack-asses from Spain", and develop an "air pump for the brain". These stories look very unspecified and could be in vain, however, the media spread the market gossip through newspapers. South Sea was "all the talk and fashion" in London. King Goerge I, half the members of Parliament, genius Newton, the poet Alexander Pope were eager to be in a group of popular companies' shareholders. However, those companies took sudden leaps and fall, crashing down between 81% and 96% off the peak.
Nifty Fifty is also the example of the bubble collapse during 1960s when blue-chip companies were trusted by absolute public confidence. The 50 companies included IBM, Coca-Cola, GE, McDonald's, Disney, Xerox etc. Investors were fenzy about them, believing there is no such high price and could afford to take in account whenever risk might occur. They were absolutely sure they could thoroughly earn the profits. The average p/e ratio was formed from 80 to 90, which was sold in 8 to 9 later in 1973. The investor learned the lesson; FOMO will never happen again.
However, when the economy is growing and lays positive mindsets to investors, things happen again. Mass media only carries good news and the stock markets surges. In 1990s, an idea that internet will change the world was slogan of investors, considering there is no such high price of e-commerce and dotcom companies. Stocks were traded not regarding to the p/e ratio. Most of transactions were based on the growth of sales or the visitors of the websites which was standard on estimating the price. The craze has reached the realm of bubbles, and investors have finally conceded defeat as they cannot resist the frenzy called 'dotcom bubble'.
Financial crisis 2007-2009 was formed with the belief that the house price will never fall. In fact, there were only three cases when nominal national housing price Index fell until 1997. Twice fell by about 1%, and once by 2.8%. Thus, the decline in the national real estate price index has never been close to 20 percent after the World War II. Banks or financial institutions lent money to the house seekers by issuing subprime mortgages without the lender's minimum proof of income or evidence of employment. Later these mortgages where combined together with other different grades such as prime or lower. These were trenched into new derivatives or complicated funds; most recognized one is CDO. FED lowered FFR to promote housing markets. Regulators eased the Glass-Stigull Act, which led to three times more leverage, and strengthen uptick-rule to prevent downward bets from short forces. Investors were in FOMO phenomenon; they did not want to miss the rally of house market. Due to the rise in CPI, FED could raise interest rate gradually since there was no sign of dollar being stronger. Decline in borrowers made the housing market weaker. Assets related to the market gradually was bear steepening making investors in panic to sell whatever they have, crying to save them from danger.
I did not find the bubble until 2019 (may be corporate bonds due to the little yield spread between corporate bonds and treasuries with same maturity). However, COVID-19 has spread all around the world making the countries in lock-down. The decline in supply and demand made the economy deteriorated. Nevertheless, assets have quickly recovered due to the fast response from FED and U.S Treasuries. I can see some of the specific stocks and assets that seems to form a shape of bubble such as electric vehicle and semi-conductor companies, commodities such as gold, bonds, and so on in near days. (Kodak is one of them) May be monetary and fiscal policy can help to change in investor's sentiment positively. However, the policy does not have much card to elevate the stocks in the future, if YCT or negative yield won't be proceeded. (Announcement
effect by future guidance won't be a strategy next time)
I love Mark Twain's quote: History doesn't repeat itself, but it rhymes. Howard Marks have repetitively emphasized the market cycle. Positive events amplify investors' risk-taking tendencies, but when the turmoil arrives, they rush to sell, even though it's a low-cost buying opportunity. According to the article of Jason Zweig, behavior of FOMO and bubble is not a bad thing; it is about human nature.
In conclusion, the winner and the loser in the investment field is determined of how they restrain their instinct and have second-order thinking. This is they way to let our portfolio outperform in the market. There is a word I really love from a janitor (Mr.Read) who made 8 million dollars from small amount of money for 65 years. "Investing is not IQ test, it is test of character". Never be a part of a group of FOMO behavior.
Twitter of Mr.Muthukrishnan
"The risk is never in volatility but in our reaction to it."
Thanks to WSJ article from Jason Zweig and books of Howard Marks, I was able to write this blog.
Source 1: From 1720 to Tesla, FOMO Never Sleeps
https://www.wsj.com/articles/from-1720-to-tesla-fomo-never-sleeps-11594994422
Source 2: Why Stocks Are Hitting Records as Economic Fears Rise: ‘There Is No Alternative’
https://www.nytimes.com/2019/07/11/business/stock-market-record.htmlSource 1: From 1720 to Tesla, FOMO Never Sleeps
https://www.wsj.com/articles/from-1720-to-tesla-fomo-never-sleeps-11594994422
Source 2: Why Stocks Are Hitting Records as Economic Fears Rise: ‘There Is No Alternative’
Source 3: The Lemming Effect
https://cyclingtips.com/2010/04/the-lemming-effect/#:~:text=Lemmings%20are%20small%20rodents%20that,off%20the%20edge%20of%20cliffs.&text=This%20Lemming%20Effect%20enables%20entire,phenomenon%20taking%20place%20with%20cyclists.
Source 4: Ancient Babylon
https://economics.mit.edu/files/7258
Source 5: Do You Know the Difference Between Being Rich and Being Wealthy?
Source 6: History of Bubbles
https://archive.org/details/anhistoricaland01andegoog/page/n121/mode/2up
so what kind of stock do i have to buy?
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