Liam Nunn, manager of the Old Mutual European Equity (ex UK) Fund, looks at the rise of bitcoin, the zeal of the ‘FOMO’ investor and the long-term power of value investing.
Up until a few years ago, like most Brits I’d never heard of Black Friday. But I suppose – given that shopping, standing in queues and complaining about the weather are three of this country’s most popular pastimes – it’s not altogether surprising that an annual tradition based around shivering outside your local Currys at the crack of dawn has been warmly embraced by the great British public. After all, when it comes to shopping, we all love a bargain. Nothing makes us happier than the thought of snapping something up for less than it’s worth and getting the best possible price for an item.
It’s therefore quite strange that when it comes to investing, many people abandon their discount-savvy instincts in order to focus on assets that have recently increased in price. It was amazing to observe how in the same week that shoppers around the globe were literally punching each other in the face to save a few quid on a TV, the bitcoin price hit an all-time high as new participants flooded into the market in a desperate bid to grab a piece of the action. There were even newspaper stories of people quitting their day jobs to become full-time bitcoin ‘investors’ after watching the price of the crypto-currency rocket over 1,000% in the last 12 months. Contrast this with the way people would react if they turned up to a Black Friday sale to find the price of TVs had been increased by 1,000% overnight. It’s hard to imagine they’d respond by wildly quitting their jobs in order to spend more time at the checkouts.
When it comes to financial speculation, the fear of missing out while others are getting rich can blind people to the risks they are taking. This doesn’t just affect novices buying a crypto-currency without any sensible means of judging its value. Professional money managers can be just as guilty of getting swept up in the madness of crowds. After a decade where value investing has struggled on a relative basis, the vast majority of managers are increasingly crowded into quality/growth stocks that trade on ever greater multiples of profits; and most remain generally reluctant to go bargain hunting in the areas of the market where earnings multiples have been left behind. In fact, a glance at Morningstar’s Style Analysis of the Europe (Ex UK) Large Cap sector suggests the total assets under management invested in growth strategies is now around seven times greater than the total invested in value funds.
If you believe in the long-term power of value investing this is actually very good news. After all, if more people would rather chase bitcoins than venture out in the cold to dig around in the bargain buckets of the stock market, the chances of finding attractive deals are likely to be significantly higher. Value investing isn’t glamorous at the best of times and it’s particularly psychologically taxing when it seems to all the world that there are much easier ways to get rich quick.
But as Charlie Munger famously put it: “it’s not supposed to be easy. Anybody who finds it easy is stupid”.