It’s been a roller-coaster year and a half since the Sars-Cov-2 virus, which causes Covid-19, was first identified in Wuhan, China, in December 2019. Since then our lives have changed dramatically. Masks, social distancing, zoom classes and sanitising have become the norm, and while vaccines may help to bring some normalisation, post-pandemic life is sure to look different to the pre-pandemic normal.
There have been equally many investment challenges over this period, and the world seems ever more unstable and more unpredictable than it did pre-pandemic. Currently, there are two factors that stand out in my mind as the primary challenge for (young) investors wanting to build wealth in an unstable world.
Fear and greed (a.k.a FOMO)
It is often argued the biggest enemy of investors, is making decisions based on fear and greed. This is still true today, but our definition of fear needs to be updated to include FOMO (fear of missing out). Nowhere is this fear more tangible than when it comes to cryptocurrencies. Blockchain is a revolutionary technology, and I am sure it will change our society in many ways. But investors should also remember that while a technology may revolutionise the world, not all instances of that technology, or every company that produces it, will survive. Betamax and Kodak have both shown that even big companies can get it wrong, and while some great names like Microsoft are still with us following on the dot.com bubble today, many others (like pets.com) have died. New technologies are inherently risky, and nothing is ever as certain as we would like to believe. While technologies move fast, societies adapt and change more slowly, and many technologies fail not because they are bad technologies, but simply because people do not adopt them quickly enough. Despite all the hype, speculation and wild price gyrations, it is sobering to remember that the number of transactions concluded in Bitcoin, are still hovering at similar levels to 2017. Bitcoin’s share of total cryptocurrencies market value has fallen from nearly 70% at the beginning of 2021 to 46% as at 3 May 2021 (Source: Bloomberg).
Number of daily Bitcoin transactions worldwide from January 2017 to 13 April2021
While only time will reveal the future of bitcoin, and cryptocurrencies for that matter, investors need to ask themselves if they are pursuing crypto currencies solely out of FOMO, or because it is offering a robust long-term investment proposition.
Peer pressure can make you overpay
There are many companies that are worth less today than they were in the past. This can be due to poor management, changing conditions or aspects of their business models that impact their profitability, because they have fallen out of favour or due to other cyclical factors. For whatever reason, share prices can diverge wildly from what we call the “intrinsic value”, or what a company is really worth when you strip out market noise. Deriving the intrinsic value is both an art and a science – had it been easy, no-one would ever overpay for an asset or fall prey to sentiment! But in principle, if you can buy an asset below its intrinsic value, the chances are far better that you enjoy growth on your investment. The challenge facing investors at this time, is that the prices of some assets have been driven to stratospheric heights. These might be very good companies, and they might be around for a long time, but when you buy an asset at such a high starting price, a lot has to continue going right for that company to deliver on (typically inflated) expectations.
It can be very difficult not to invest in the market darling when everyone else seems to be buying in to the prevailing narrative at any price. Peer pressure, even for fund managers, is real. However, we believe that the tried and tested path to building long-term wealth remains buying quality assets for less than their intrinsic value, and reaping the growth and income from that decision for years to come.
The world is certainly more uncertain and less stable than it was a mere eighteen months ago, but the challenges facing investors remain as real (and predictable) as ever. While market noise is sure to continue distracting investors as it always has in the past, FOMO and peer pressure are sure to remain the true enemies of those looking to build wealth in the longer term.