With the recent proliferation of social media, a previously little-known psychological condition has become commonplace: Fear Of Missing Out, often abbreviated as FOMO.
The Fear Of Missing Out is fairly self-explanatory: anxiety manifests from the possibility of a significant event occurring without us knowing. It could be a viral online photo, a gathering of friends, a recent news headline or a great investment idea. The feeling of anxiousness is temporarily relieved by continually checking social media, news feeds and Bloomberg terminals for updates. A cursory Google search yields hundreds of self-help articles. Many are seeking help from psychologists.
While this new-age addiction comes off as sounding slightly absurd, it has been occurring in the world of investing since Tulipmania in 1637.
In fact, the Fear Of Missing Out has caused every asset bubble. Price quickly becomes immaterial and the bubble swells as each subsequent investor pays a hefty admission to jump on the bandwagon – a typical reaction to the symptoms of FOMO. Eventually the trend reverses and investors succumb to FOMO yet again. Those who are sensible enough to ignore the speculation are labeled as fools.
A more recent example since Tulipmania is Nortel Networks. In mid-2000 it reached its peak weight within the S&P/TSX Composite Index, making up 34% of the total Index. Many declared it the poster child of the “new economy.” Money managers, under constant short-term pressure from investors, were fearful of the career risk resulting from deviating too far from benchmark performance. In response to the unease, those who lacked conviction would “underweight” Nortel in their portfolio. Being naked Nortel was considered a sin.
In reality, Nortel demonstrated few attributes of a high-quality company. Inconsistent earnings, a feeble balance sheet, a history of poor management decisions and hints of tainted accounting were enough to cross it off Burgundy’s Dream Team. If any further validation was needed, its valuation was nowhere near sensible. Richard Rooney, who at the time managed our Canadian equity portfolios, had the rare prudence and conviction to steer clear.
Capital preservation is a core tenet of Burgundy’s investment philosophy. Permanent capital loss has a devastating effect on wealth accumulation. The impact of capital loss (and closet indexing) is validated by the chart below, which illustrates the cumulative performance of $1.00 since September 2000 under two scenarios:
Investing $1.00 in the S&P/TSX Composite Index would have accumulated to $1.67 at the end of 2013. Alternatively, by excluding Nortel, that same dollar would have accumulated to $2.62 over the same time period. That’s an incremental gain of 95% by simply avoiding Nortel. It is no surprise the spread between the two lines increases over time. This is the magic of compounding, and the curse of capital loss.
While avoiding companies like Nortel is a key ingredient in the Burgundy investment process, we certainly do not rely on this exclusively; our Investment Team has found many ways to add value. To demonstrate, the performance of the Burgundy Canadian Equity Fund1 is shown below, which, by the end of 2013, had turned $1.00 into $5.14.
By avoiding losers and finding a few winners along the way, capital compounding can really work its magic. We attribute the long-term success to our disciplined investment process, independent research, and our commitment to paying sensible prices for quality companies.
- To best mirror the “all cap” nature of the S&P/TSX Composite Index, the performance of the Burgundy Canadian (All Cap) Equity Fund is shown for comparison.
This post is presented for illustrative and discussion purposes only. It is not intended to provide investment advice and does not consider unique objectives, constraints, or financial needs. Under no circumstances does this post suggest that you should time the market in any way or make investment decisions based on the content. Select securities may be used as examples to illustrate Burgundy’s investment philosophy. Burgundy funds or portfolios may or may not hold such securities for the whole demonstrated period.
Investors are advised that their investments are not guaranteed, their values may change frequently and past performance may not be repeated. Investment returns and principal value will fluctuate. All rates of return are time-weighted historical annual compounded total returns and are before investment management fees, but after administrative and trading expenses. Annual investment management fees for the Burgundy Canadian Equity Fund are 1.25% per annum. The Fund is currently closed to both new and existing clients.
Investments in Burgundy Funds assume the reinvestment of all dividends and distributions and do not attract any sales, redemption, distribution or optional charges or commissions or trailing commissions that would reduce returns. Burgundy’s portfolios make concentrated investments in a limited number of companies, therefore a change in one security’s value may have a more significant effect on the portfolio’s value.
Rates of return do not take into account any income taxes payable by investors, where applicable. Performance-based fees are not applicable for the Burgundy Canadian Equity Fund. The benchmarks shown are unmanaged indices of common stocks that are generally considered representative of the various capital markets.
This post is not intended as an offer to invest in any investment strategy presented by Burgundy. The information contained in this post is the opinion of Burgundy Asset Management and/or its employees as of the date of the post and is subject to change without notice. Please refer to the Legal section of this website for additional disclosure information.