The Power Of The Fear Of Loss, No One Wants To Miss Out
$FB, $TWTR
There are 2 markets now which show strong signs of attracting capital in substantial part because of this fear, they are;
1. China’s stock market and,
2, Silicon Valley’s high technology factory.
China is enjoying a fast ride North, money is flowing into stocks in part because investors believe the State Council wants a Bull Market and in part because of media analysts attention fueling the action.
Some savvy veteran participants sees fear of missing out aka FOMO, as part of the driving force behind the rush of private capital into early-stage and more mature but often still unprofitable high tech companies.
“We are in an environment of extraordinary low interest rates, of enormous quantities of liquidity looking for a return,” said one venture capitalist last week. “There is the phenomenon of FOMO, fear of missing out on the next Facebook (NASDAQ:FB), the next Twitter (NYSE:TWTR).”
Venture capitalists are so motivated by the prospect of huge scores if they identify the next social media or other giant that they are funding nonpublic companies in unprecedented sizes.
That action has allowed the ‘Advent of the Unicorns’ , the 90 or so companies with market values of $1-B or more which have been entirely funded on the private markets each with a relatively low probability of success. The mass of funds put into these companies will not collectively earn a respectable return.
In China, the more than 2X’ing in the Shanghai Stock Exchange has attracted legions of new investors including icon Bill Gross.
New equity trading accounts rose 433% in Q-1 from a year earlier, according to official data, with more than 50% the accounts set up by investors aged up to their early 30;s. The China Household Finance Survey found that more than 67% of the new investors in equities had not completed high school.
Much of this may be driven by concerns about relative wealth, or how much you have compared to those in your group, a force explored in a Y 2007 paper by Peter DeMarzo and Ilan Kramer of Stanford University and Ron Kaniel of Duke University.
The researchers found that even when traders understand that prices are too high (overbought) they may stay in the market because they fear losing out as the overvaluation persists and extends.
“Relative wealth concerns help support the existence of financial bubbles by increasing the risk of trading against the crowd,” the study found. “When relative wealth concerns are sufficiently strong, they can promote the creation of price bubbles.”
Participants want to keep up with their peers, and fear not having as much wealth. That raises the risk of selling into a bubble. That status and group-motivated anxiety can blind investors towards other, seemingly obvious risks.
In some ways this seems to be more likely to happen in micro-climates such as Silicon Valley than in a large economy like China. After all, the huge influx of wealth has driven up the cost of most things people would like to buy, like houses, in Silicon Valley, while at the same time recalibrating upwards expectations about what constitutes an acceptable standard of living.
That is less true in China where the amount of wealth being generated is far smaller in relation to the economy.
This is true, so far as it goes, but participants often get their expectations and sense of what is normal from communities, online or in real life. In these communities, tall, or true, tales of gains serve to drive participants into risky assets and to make them less sensitive to risks.
A larger point: that often these types of bubbles produce transformative technologies that otherwise would not come into being as quickly.
Just as people lost money in railroad shares in the 19th Century, or radio stocks in the 1920’s, so did the railroad and radio transform Modern life.
“The way to think about financial speculation is that bubbles are banal, but every once in a while they are necessary,” writes one savvy observer.
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A better strategy might be to put aside fear of being left behind and enjoy the changes the bubbles finance, while at the same time be prudent in your investment strategies, hedge your risks, do not talk about what you are doing, and do run with the crowd that does.
Remember, the name of this game is to make money, take fear out of the equation.
Have a terrific week.
HeffX-LTN
Paul Ebeling
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