Is It Different This Time?
INVESTING“Even a fool may be wise after the event”
- Menelaus to the son of Panthous
The Iliad by Homer
The Fear of Missing Out, or FOMO, was a relatively new societal phenomenon first identified by Dr. Dan Herman in 1996. Facebook popularized this term a few years later when it opened an endless stream of activity and social engagement available at our fingertips. Continuously reminding us of what we were missing.
The regret and anxiety that comes with missed opportunity is not a new concept. It’s human nature. Investors have wrestled with this for decades. How else do you explain Jordan Belfort convincing someone to buy penny stocks over the phone?
FOMO was front and center for investors in 2020.
Return performance for 2020 provided by Morningstar.com. All performance referenced is historical and is no guarantee of future results. This is not a recommendation to invest in any specific stock or company.
At first glance, investors missed serious opportunities. However, Tesla’s 2020 performance fails to provide context. An all-electric automobile company with marginal investment returns since its Initial Public Offering (IPO) experienced an unrivaled increase despite a global pandemic. Not exactly a reassuring storyline.
Focusing only on the outcome can be frustrating. It amplifies anxiety for investors who feel they missed out. We believe analyzing results in context helps lead to more informed decision making. Improving our odds of success.
PERSPECTIVE
“The four most expensive words in the English language are ‘this time it’s different.”
-Sir John Templeton
You can’t go more than a mile without seeing an Amazon van humming down the street or someone scrolling on their iPhone. These tech giants are more ubiquitous than ever. It’s easy to forget that many of these companies were born out of a simple idea and occasionally in a garage. Their strong foundations are the reason we own them today. But is this level of growth sustainable? Should they be our only focus moving forward? Is this time different?
The truth is, the stock market is an ever evolving, dynamic environment. Companies that experience this type of investment growth have no guarantee it will continue after they reach the top. In fact, research finds the opposite to be true1.
This information is intended for educational purposes and should not be considered a recommendation to buy or sell a particular securityWHAT WE’RE DOING
When was the best time to own these prolific companies? When they were nascent tech start-ups with a mission to disrupt their respective industries through teamwork and innovation. The challenge is identifying which companies will survive and excel decades after their inception.
Right now, there are thousands of companies competing to become the next Amazon, Google, or Tesla. Working to grow, expand, and steal market share away from today’s giants. These companies are cheap, and risky. Our approach targets ownership of these companies alongside the names we all know. Not after they have a store on every corner.
No matter how much experience you have in business, industry or investing, you won’t be able to identify the shooting star with any level of consistency until after it’s happened. Owning them all puts the odds in your favor.
Exuberance for Tesla has shifted to Cryptocurrency speculation in 2021. For investors, it’s worth remembering there’s always another opportunity around the corner. Missing an investment outcome that was only obvious in hindsight is not worth losing sleep over.
1. In USD. Source: Dimensional, using data from CRSP. Includes all US common stocks excluding REITs. Largest stocks identified at the end of each calendar year by sorting eligible US stocks on market capitalization. Market is represented by the Fama/French Total US Market Research Index. Annualized Excess Return is the difference in annualized compound returns between the stock and the market over the 3-, 5-, and 10-year periods, before and after each stocks’ initial year-end classification in the top 10. 3-, 5-, and 10-annualized returns are computed for companies with return data available for the entire 3-, 5-, and 10-year periods respectively. The number of firm included in measuring excess returns prior (subsequent) to becoming a top 10 stock consists of 39 (54) for 3-year, 38 (53) for 5-year, and 30 (47) for 10-year.
The opinions are for general information only and are not intended to provide specific advice or recommendations for any individual. The opinions expressed in this material do not necessarily reflect the views of LPL Financial. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.