February 7, 2023

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Is Fomo the New Greed in Investing?

If investors insist on timing their moves in stock markets, Warren Buffett said nearly 20 years ago, they should be fearful when others are greedy and greedy only when others are fearful.

It’s good contrarian stuff. And the time-honoured depiction of markets in the perpetual push-pull grip of these two animal spirits has an enduring appeal because (nuances and caveats aside) it actually explains a lot of market psychology fairly well. The difficulty arises, as now, when greed and fear begin to define themselves as the same thing.

Analyzing the FTX collapse — and a number of other recent debacles that seem ominously comparable to phenomena of the easy-money era — fear of missing out (Fomo) has repeatedly emerged as a crucial part of investment construction before the fall. Fear, in this usage of the word and in the context of FTX and the broader crypto bull run, created what looked very much like irrational exuberance. This exuberance, in turn, fueled something that, from a market standpoint, behaved very similarly to greed during their regular stints at the wheel.

As the Fomo narrative puts it, investment money (much of it under the auspices of large, seemingly respectable funds) collectively thunders into certain assets (in many cases with minimal care), not because it necessarily believes in the underlying opportunity, but because the Rewards are presented as obvious and the consequences of delay or skepticism are somehow frightening.

The idea isn’t new, even if the acronym is. Similar thought processes existed in previous crises. In 2007, Citi’s Chuck Prince famously emphasized the need to dance as long as the music played: a freely chosen indulgence presented as an undeniable obligation.

So is the current version of Fomo just greed in disguise? It’s tempting to think, or at least to conclude, that the word “fear” here describes a fear that is more random and easily overcome than, say, fear of loss, worth annihilation, or worse. Presenting fomo as genuine fear requires evidence that there is a price to pay for missing out (as stores experience, for example, in panic buying prompted by a public alarm). Self-blame for a missed bonanza or the wrath of a dissatisfied investor doesn’t quite count.

However, over the past half-decade of tech-centric investing, Masayoshi Son’s SoftBank has been at the forefront of instilling a more legitimate set of fomo concerns in certain investors. When the first of its Vision Funds launched in 2017, the $100 billion vehicle was explicitly designed to create a new genre of technology investment.

It did (or planned to) do this by not only using its scale to identify potential winners, but also showering them with enough funding to ensure that according to metrics like market share, they were likely to be. This implicit guarantee of dominance, flawed as it might be, set a tone that would resonate: if investing is not about prospects, but about certainties, then Fomo is not greedy, it is wise.

With tech and crypto fomo now in limbo, a much larger and more complex version is now emerging in China that could dominate corporate and financial investment next year. A number of fund managers state that they are already positioning themselves for a short-term “Fomo event”. A relatively quick reopening of China or a sharp relaxation of zero-Covid rules is a change no global or Asia-focused investor can afford to miss. The feeding frenzy could increase very quickly.

But the longer-term fomo trade is linked to geopolitics and the way US and Chinese industrial policies have diverged enough from each other that some form of decoupling seems more inevitable. Behind the US Chips Act’s rhetoric and “Made in China” ambitions are geopolitical shifts that could eventually force more and more companies — in the US, Europe, Japan, South Korea and elsewhere — to make some sort of choice between the two blocs . In some cases, this could come in the form of redesigned supply chains and other “friendshoring” investments to enable dual manufacturing and dual distribution.

For others, however, there may be serious pressure to even reconsider being in China. And business leaders and their investors might want to consider that there could be valid reasons to miss out on the world’s biggest driver of GDP growth. This will really give Fomo the “f”: The question is whether the fear is strong enough for companies to push back before it happens.