Some People Gotta Learn the Hard Way

As a young investment advisor, I got my first taste of Fear Of Missing Out (FOMO) with the Beanie Babies craze. In 1995 the internet, a new technology which encourages and fosters crowd behavior, no matter how irrational, created the first internet sensation, Beanie Babies.

With clever marketing, and limited supply of the Babies, Ty, Inc. created a marketing and investing fad. It may seem unbelievable now, but consumers snapped them up as they were only going to go up! And they were going up! FOMO creates the desire to hurry so you don’t get left out. I had to beg, literally, to convince some clients not to use Beanie Babies as a retirement asset.

Beanie Babies didn’t produce dividends; didn’t have earnings, so there is no claim on future cash flows. But for a while they really did go up! And the economic theory around that is known as the Greater Fool Theory. The “investor” bought
the Beanie Babies at one price and hoped a “Greater Fool” would pay more for them later.

Fast forward to 2022 and one can clearly see the Beanie Babies economic behavior of the 1990s is true for today’s cryptocurrency speculators.

This is what Warren Buffet aptly calls: rat poison squared.

FOMO was in full steam in the crypto market and the steady rise was just so tempting. One great advantage of knowing history and economics is that it’s not difficult to identify a bubble. The difficulty is trying to predict when it will pop. But pop it will, and popped it has. As I write this today, some two trillion of “value” in crypto has evaporated.

And heck, a little speculation is fun. That’s why casinos are so profitable, but one should never confuse speculation with investing.

Investing links each asset in an investment portfolio to an investor’s goals, and risk tolerance. As we negotiate the current market volatility, turn off the noise. Focus on your long term goals and stick with assets, like index funds and DFA passive mutual funds that have withstood the test of time. The biggest risk is not
a short-term correction: it’s the missing out on the positive expected return of equities going forward.

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