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Sick from $NVDA FOMO? Here's the Vaccine
A Deep-Dive Into How Value Investors Stop Fearing the FOMO
In case you’ve been living under a trailing-edge semiconductor chip, you would have heard by now about how NVDA 0.00%↑’s stock has veritably exploded following its latest earnings call — with its share price rocketing by +25% over the past week alone. This leap of epic proportions is akin to watching a giant mastering parkour — propelling NVDA 0.00%↑’s market cap close to the symbolic $1T market cap milestone.
Some among us who identify as value investors might be beating ourselves up right now. The reality is that the value investing style is unlikely to have noticed such a stock in advance — so what’s the point then? Why stay a value investor if you have to slog through earning +15% CAGR annual returns — instead of increasing your net worth by +25% overnight?
In this article, it is not my intention to show you how value investing can better help you to pick such +25% one-night jumps like NVDA 0.00%↑. Rather, it is to show you how you can stop feeling bad about the Fear of Missing Out (FOMO). Once we understand that such disciplined investing methods are really our best option, it becomes easy to accept that +25% pops like NVDA 0.00%↑ cannot be consistently counted on to recurringly happen — and therefore it becomes easy to let go of the resulting FOMO.
We can all agree that the same kind of investing attitudes that lead to scoring on NVDA 0.00%↑ will also similarly help destroy our portfolios ala Bitcoin — and since having a handle on our emotional vices is the key towards achieving LT outperformance in stock markets, there is value in investing your time into reading this article. Allow me show you how value investors genuinely overcome their FOMO.
If you’d like to catch up on NVDA 0.00%↑, here are several excellent discussions which were recently published by fellow stock analysts:
Understanding NVDA’s +25% pop last week through the lens of ‘reference points’
Amidst all the recent excitement, it’s easy to forget that as recently as last week, NVDA 0.00%↑ didn’t look nearly as enticing as it does today. The proof of the pudding can be found in that while most value investors did indeed miss NVDA 0.00%↑ ‘s pop last week, so did the vast majority of growth investors. Since ChatGPT launched a few months ago, I’ve been keeping tabs on NVDA 0.00%↑ just out of curiosity together with a few other analysts who would probably self-identify as the latter — and while some of them had voiced their prior optimism for the stock, none of them actually spotted last week’s massive earnings beat in advance, nor did they take a position in it.
Also consider the following. Prior to last week’s earnings announcement, NVDA 0.00%↑ was already trading in excess of 150x trailing P/E — and even with the massive uplift in sentiment from ChatGPT and AI storming the investor zeitgeist, absolutely nobody I personally knew thought that NVDA 0.00%↑ was trading at anything less than fairly valued prior to last week. It was only with the past week’s newly announced developments that the mood on NVDA‘s valuation suddenly lifted. Whether its post-announcement P/E can be justified going forward is besides the point — the fact remains that very few people in the world nailed last week’s earnings beat, or thought that NVDA 0.00%↑ was undervalued to the degree that consensus thinks it is today.
I’ve described this “hindsight analysis” phenomenon as survivorship bias in my earlier value investing primers (linked below) — where investors tend to latch onto present-day stock prices as their reference point for judging their past investment performance, and look back to ascertain how they had performed (with the benefit of full 20/20 hindsight). This is in contrast to a more objective way of performance assessment, which judges the merits of past investments with only information that was available to investors at the point of their investment (i.e. without 20/20 hindsight) — rather than based on present-day results.
For instance, investors today might look back at NVDA‘s +25% outperformance last week and beat themselves up by asking questions like “why did I miss that” or “if only I knew”. This amounts to using present-day results as a reference point — and assuming that one had full 20/20 hindsight prior to the event, yet still failed to act on it. As I’ve demonstrated in the NVDA example above, the reality is that investors never will have 20/20 hindsight — and even if a perfect clairvoyant somehow did, the investment decision would still be befuddled with self-doubt considerations like “is this prophecy even real” or “that doesn’t sound very realistic”.
A more realistic (and accurate) way to approach historical performance attribution is to assign the point in time when the investment decision was made/could have been made as the correct reference point instead — rather than present-day results — and judge our stockpicking activity based only on the merits of information that we could have realistically known at the time (rather than full 20/20 hindsight).
For instance, let’s take a random point in time during 7 Oct 2022, when NVDA 0.00%↑ was at trough share prices after cratering by -63% over the previous year. If we used the present-day as our reference point, that time would have been the absolute best time in the past year to start a position. However, it’s far more likely that prospective NVDA 0.00%↑ investors at the time would have been wondering just how much more room there was for NVDA’s share price to continue sliding — since their reference point at the time would have been far more likely to be benchmarking against the peak share price attained in Nov 2021 instead.
This exercise shows how the reference point against which we compare our past performance not only matters, but is all that matters — using different reference points leads to different interpretations of past performance, despite involving the same data. Unfortunately, markets have conditioned investors to only use the present-day as a reference point. If you really take some time to think about it, that’s a completely absurd way to approach historical stock performance attribution. Firstly, there are a gazillion and one factors outside of company fundamentals which affect the share price (e.g. macro) — so if one of those causes the share price to fall independently of fundamentals, using the present-day as a reference point would lead one to deduce incorrect conclusions about the underlying business. This is a big part of why I believe EMH doesn’t really exist — in fact, I wholly believe that its presence does more harm than good.
Secondly, and perhaps more importantly, using the present-day as a reference point to assess your stock performance means that your starting point changes every single day. It’s one thing to chase moving targets — but how do you even set a target if the ground is constantly shifting underneath your feet? This kind of top-down extrapolation — which starts from the present-day and inferences backwards to the time when the investment was made — is internally consistent with itself, since your starting reference point changes every single day… and therefore you are drawing a different conclusion based on the same past investment decision every single day — often without even realizing it yourself!
This is why a stock can seem like a darling one day, only to feel like a dud the next, and then right back to darling next week — because the reference point (i.e. present-day share price) from which we are interpreting our past performance changes every day! In other words, using the “present-day” as our reference point is completely arbitrary.
This point can be further emphasized when we turn our attention to the future. Let’s say that for whatever reason, the Fed did the complete opposite and lowered interest rates back to 0.25% by end-2024. What then would be the new consensus interpretation of markets in FY22 (characterized by interest rate hikes) under this new “present-day” reference point? I can guarantee you that it would be dramatically different from whatever we are hearing in the news today — despite FY22 having already passed, and nothing whatsoever changing during that year. This is because the consensus interpretation of FY22 using today’s hawkish monetary policy as a reference point will be dramatically different as compared to using the aforementioned future dovish scenario as a reference point. E.g. Instead of punishing Cathie Wood, markets might prop her up for ‘holding the fort and foreseeing this outcome all along’.
This example serves to demonstrate how arbitrary reference points are — and therefore how arbitrary backward-looking interpretations of past performance are. As we saw with the NVDA example above, simply changing the reference point can lead to completely different interpretations of past performance despite involving the same data/experience. However, markets have taught investors to unquestioningly assume the present-day as a reference point — which is absurd, since if something new developed tomorrow, it would render today’s interpretation of past performance completely irrelevant.
Allow me to further emphasize this point by using NVDA 0.00%↑’s spike last week as an example. Great, NVDA outperformed last week — but its share price also increased by +25%. Is it still a good investment today? That depends, what reference point are you using? The future, yes — but what future? Is there an inevitable future that is fated to happen by the gods, implying that our destiny runs on rails? And even if it did, the subsequent question becomes “of the infinite possible points in the future, which future point do we choose?”
This line of questioning raises a very curious conundrum. We can imagine that the future trajectory of NVDA 0.00%↑’s share price would reflect cyclical peaks & valleys — but depending on which point on it we use as our reference point, it could lead us to very different interpretations of past performance! Also, notice how the status quo backward-looking interpretation of past performance doesn’t ask itself which reference point it uses? It automatically assumes the “present-day” as the reference point — which raises the aforementioned problem of such reference points changing literally every day; and therefore the resulting interpretations of past performance being completely arbitrary, since they can change every day as well.
Yet despite the impossible task of attempting to prophesy today all of the excessive distribution of possibilities for NVDA 0.00%↑’s share price over the next three years (as I’ve demonstrated above), investors will just take whatever ends up happening in any given “present-day” in the future and inference backwards as if it was an inevitability. This implies that unbeknownst to even themselves, investors are drawing completely arbitrary conclusions about their past performance — since it could change literally overnight! This demonstrates how all-important the concept of reference points is when interpreting past performance — because depending on which you use, it could lead to a completely different interpretation of past performance. Doesn’t this reconcile with the chaotic nature of how your historical stock performance attribution feels like? That’s because the market has taught us to unknowingly change our reference point every day!
Using NVDA 0.00%↑ ‘s developments last week as an example, investors are clearly using the present-day as a reference point and extrapolating backwards in order to justify their stock performance — when just one week ago, that reference point would not have helped you predict last week’s +25% pop at all. And if NVDA unexpectedly normalizes next week, that new reference point would lead you to conclude that last week’s +25% pop was just a sham!
This example serves to demonstrate how backward-looking interpretations of past performance are “all made up and the points don’t matter” (i.e. arbitrary). They’re all made in reference to the present-day as a reference point — and that reference point changes literally every day, leading to a different possible interpretation of the same data/experience literally every day. Rather, the solution is to recognize how pointless it is to feel bad about backward-looking interpretations of past performance — and then just stop hitting yourself.
To digress slightly, the only practical solution to such arbitrary benchmarking of past performance is to take a brute-force approach of estimating all possible future reference points — such that we are prepared for any reasonably possible scenario which ends up materializing. This is the essence of asymmetric risk:reward — which I’ve described before in excruciating detail in my previous value investing primers (links below), and is summarized in the following familiar value investing quotes:
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Why FOMO Is A Waste Of Time
Clearly this top-down inference of past performance from whatever the “present-day” happens to be does not reflect reality — nor will understanding it give you better insight into making forward-looking forecasts. If so, then why feel FOMO over past performance? It’s completely arbitrary!
Hence, allow me to demonstrate how we can stop feeling bad about FOMO — using the example of NVDA 0.00%↑ above. If as aforementioned, we recognize that the problem actually lies with investors themselves arbitrarily extrapolating backwards from constantly changing present-day reference points in order to interpret their past performance — then clearly we also need to recognize that hoping to replicate perfect investment outcomes according to such impossible standards is but a fool’s errand, since you are aiming for completely arbitrary targets that don’t actually exist. Thereafter, the inevitable first step that we must take — in order to reconcile our stock market expectations with reality — is to embrace less-than-perfect outcomes.
What do less-than-perfect outcomes entail? Simple, they mean learning to accept not achieving the absolute best outcomes. Remember, when you look back on the performance of an investment which you made 2-5 years ago, it’s more likely than not that you’ll be looking back with 20/20 hindsight — which includes new information & developments which didn’t exist all those years ago. Beating yourself up for not being able to divine such non-existent information — based on an arbitrary present-day reference point which could literally change overnight — amounts to getting depressed over nothing. The correct stance to take instead is to accept that you’ll never have 20/20 hindsight throughout the entirety of your investing career — and therefore embracing less-than-perfect outcomes is the absolute best result that you should realistically hope for.
Fortunately, as value investors we can adequately achieve our LT investment objectives even with less-than-perfect outcomes. Remember, our goal is merely to achieve an industry-leading 15% CAGR over the LT — not to be No. 1 all the time. Speaking from experience, it is extremely possible to attain this objective without ever achieving absolute best outcomes.
Why Is Realizing This Important? Because if you don’t, you’ll likely feel extremely unnecessary FOMO over missing out on scarce opportunities based on arbitrary “present day” reference points which can literally change every day — and which you have no realistic chance of anticipating in the first place (e.g. NVDA 0.00%↑’s +25% pop last week).
The unfortunate fact is that in order to avoid feeling such unwanted FOMO again, society teaches us to double down on taking even more risk — so as to be more “deserving” of better outcomes. Not only do stock markets not work that way, doing so actually tends to lead to much worse outcomes. The reality is that despite whatever other investors say, it is not your fault nor your responsibility that you couldn’t achieve something that was completely non-existent to begin with — and therefore you should stop feeling FOMO!
Don’t Fear The Fear of Missing Out
By understanding that perfect outcomes are unrealistic in stock markets, the value investor learns how to embrace less-than-perfect outcomes in the ST — and in doing so, sets himself up for LT outperformance in stock markets. In Howard Marks’ 1990 memo ‘The Route to Performance’, he wrote that the best outperforming LT investors tend to occupy the 2nd quartile in the ST due to not taking excessive risk — but end up occupying the first quartile over the LT, also due to not taking excessive risk. Keep in mind that Howard Marks is a self-identifying value investor — and much of what I’ve discussed above incorporates lessons learned from him.
Circling back to NVDA 0.00%↑ performance last week, what is the moral of the lesson here? Recognize that you might be starting from a faulty premise when using the present-day as an arbitrary reference point to assess your past performance based on completely unrealistic benchmarks (with full 20/20 hindsight). If so many other highly-capable sector specialists missed last week’s massive earnings beat (NVDA beat consensus earnings forecast by 18%), then in all likelihood you would have missed it too — even if you had the same information as them. Don’t set yourself up for unrealistic expectations, as not doing so will also help you avoid excessive risk-taking due to FOMO. Therefore:
Don’t Fear The FOMO, and —
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