Beware of FOMO

In my previous article (“Important Lessons We Can Learn”), I wrote about our spiraling US debt situation - involving consumers, businesses and the government - and how it has made us especially vulnerable in the midst of the Coronavirus pandemic.

Yet in a move that demonstrates how out-of-touch markets can be with reality, there was a bull run this past week as markets became hopeful over news that Coronavirus rates were slowing in some jurisdictions. Newscasters celebrated the rise. Traders speculated the downturn might have reached its worst. The news was divorced from economic indicators, sending mixed signals all over the place. Many jurisdictions are also nowhere near the peak of the Coronavirus crisis.

A reality check on our current economic state

Before Coronavirus hit, the average American was already less than one paycheck away from complete financial disaster. 4 in 10 Americans couldn’t afford a $400 emergency, 22% said they would miss bill payments to cover living costs, and half of those would use credit card debt to afford basic living.

We are at the stage where there is a basic consumer failure to pay bills and debt. Businesses have shuttered. Next, despite the aid released by the US government, there will likely be a wave of consumer proposals and bankruptcies. After that, we may see a further decline in real estate values and other asset classes, especially until lenders regain confidence and loosen their current restrictions. Real estate assets that enjoy stable, recession-hardy cash flows will prove highly valuable at this time. Some essential stocks, as well as a very select group of health and technology stocks, will weather the storm well but are at risk of extreme overvaluation due to investors’ increased focus on finding the current market winners. Many “value stocks” aren’t currently safe from bankruptcy or potential actions by creditors, given the fact that the credit crisis is only beginning.

In a telling signal, Warren Buffet took advantage of last week’s bull run by selling off $30 million in Bank of New York Mellon stocks. While everyone else was buying, he was busy selling.

FOMO (“Fear of Missing Out”) is a psychological phenomenon that can bring significant volatility to markets, especially with frenzied news cycles feeding the beast. It is a form of social anxiety that affects both buying cycles and selling cycles. 

Especially in crazy moments like these, before making any investment decisions (to buy OR sell), you should be asking yourself at least three times whether you are making a decision because of FOMO or because you are convinced the economic indicators and the investment forecasts you are looking into are truly telling you the right story.

Stocks may jump up and down at random news, but the economy itself is facing a much different scenario and we all need to take a slow, carefully-calculated approach at this moment in history. Most businesses and individuals need to prepare for a long cycle of restricted cash flows. Most lenders, with the exception of a few who are situated outside of the traditional lending space, have pulled back until there is a positive sign that lowers their lending risk.

In the midst of all of this noise and volatility, it is easy to get caught up in the fear of missing out. It’s easy to jump into action and invest or sell without fully calculating the extent of the current risk. The best thing most of us can do is turn off the news and find something healthy or productive to do.

There will be plenty of value-based investment opportunities coming very soon, both in real estate and in the stock market - as well as in private equity - and it would serve each of us well to be adequately prepared for those opportunities as they arise. But right now we need the patience to ride out the virus and bring our health situation under control. We also need to prepare for the credit crisis to manifest and make decisions once there is a clearer picture of how severe and prolonged that may be.

Stay healthy, stay safe, and spend time with your loved ones.

- Kamil Homsi

* This is part two of a series about debt, the economy, and investing in our current world. Stay tuned to learn more about risks, opportunities, and advice for navigating recessions, stagflation, and market volatility. Read part one here.