Just Say No to FOMO; Processes > Outcomes

“Maybe I don’t want to own Amazon.” – look down

The pattern is simple. XYZ is small and unnoticed. XYZ gets a bit bigger over years two to four – yet still unnoticed. XYZ skyrockets in years 5 to 7 and is now on everyone’s radar. TV shows and blogs. Friends bring it up over drinks. Co-workers start talking about it like it is the weather. But some of them want to impress you and enliven themselves with tiny colorings of the truth. Of course, they “bought in a few years ago”. But you know you didn’t. Damn.

And that was an upper. FOMOs also come in downer versions. Like all those luminaries who cashed out in the summer of 2008. You just don’t see downers as often because they are more expensive.

And this is how it happens my friend – how the investor starts using and getting high off the latest version of the Fear Of Missing Out (FOMO) drug. You can tell when someone is using. They will often be happy to tell you, as we suggested. There are subtler symptoms of ‘outcomes chasing’ FOMO dependancy as well; including an inability to articulate the basis for an investment position, or holding numerous ‘buzz word’ positions in a portfolio with recent purchase dates. I guess it all started for me twenty years ago. I mean. I was rolling out of university in 1999 for heavens sake. Tech-laced FOMO drugs were everywhere. I hate to say it, but I still get urges to this day.

Thankfully I learned to control those urges through education. Leaning that understanding ‘processes’ mightily trumps pursuing ‘outcomes’ in the investment game. Better put, understanding what series of actions and/or events tend to produce a desired result matters much more than enjoying the desired result itself…. Sort of a “teach a man to fish” vibe, if you will.

Many investment greats have long proselytized this notion; including Jim O’Shaugnessy in his wonderful blog. An excellent, no-frills example highlighting process versus outcome is, “Person A gives Person B $100. Person B goes to a casino, bets on red on the roulette table, and wins. Person B takes a $10 cut and returns $190 to Person A. Person A then tells his / her friends that Person B doubles your money.”. Um, yes. That was the outcome, but?

But people, many people, still routinely invest like this – chasing performance without properly qualifying how that performance was achieved and if it is transferable into the future. The rub is… people will keep doing it because, well, it often works. For a time. As we discussed in “To Buy or Not to Buy”, the short term trend is more probable to continue than a shift in trend. However, as mentioned in “Are You Selling Out?“, we have a heightened sensitivity to negative volatility when we don’t really understand what we own. So when the trend does shift, the FOMO crash kicks in, and all you want to do (i.e. need to do) is make that money back – watch out. Voila… You may now have an involuntary addiction to buying high and selling low.

I want to own Amazon too though. Or do I? Man, looking back, it was pretty tricky to forecast one company would absolutely dominate not only numerous industry segments, but industries themselves, and keep doing it. Maybe missing Amazon outright is not my problem. Maybe I don’t actually want to own Amazon. Maybe…

Maybe, I just want to own the process that owns companies like Amazon. Say, for example, a screen that filters for certain positive moving average price trend and volume levels, revenue growth per share, and good balance sheet governance. If I own a process over an individual security my risk profile will arguably be much lower because I would be more diversified. It would also expose me to survivorship bias, but in a good way. The names suffering from a bad pivot would simply fall off the list.

I personally hold numerous processes with long histories of risk-adjusted return outperformance. These are sometimes referred to as factor strategies as well. My factor investments tend to concentrate on momentum strategies, wide moat indices, value strategies, event-driven, and dividend growth strategies. Employing several different factor strategies, particularly offsetting strategies (i.e. value versus momentum), commonly has the beautiful benefit of reducing overall portfolio volatility without compromising return objectives. This article from one of Canada’s most acknowledged factor investors, Larry Berman, provides a good example of this multi-factor portfolio volatility reduction relationship and highlights two factor positions I own personally.

Regardless as to whether it is a factor strategy or an individual company, we need to strive to understand the process for creating economic value and managing risk of the thing we are investing in. So do your homework. Find the processes that mesh best with your values and what you are trying to achieve. And stay focused. Please stay focused. FOMO drifting can be super painful – believe me.