Getting Rich Slowly
Amazon founder Jeff Bezos once asked Warren Buffett: "You're the second richest guy in the world. Your investment thesis is so simple. Why don't more people just copy you?"
To which Buffett replied, "Because nobody wants to get rich slow."
This is sound advice, especially in today's market environment where an unprofitable movie chain could be worth more than a profitable (and growing) retailer like Best Buy.
In the past week, shares of AMC Entertainment have soared to record highs even as the company's underlying business is still in recovery mode from the pandemic. And even pre-pandemic, AMC was in a secular decline as streaming services like Netflix wooed consumers away from movie theaters.
But people don't care about that and are piling into the stock solely on the idea that they will be able to sell it to someone else at a higher price.
People want to get rich fast. It's human nature primarily driven by greed.
And when people (especially new investors) see a stock doubling in a single day on no official news, regardless of the company's underlying business fundamentals, they tend to pile in hoping that the trend higher will continue.
These types of rallies are unsustainable, and the crash back to earth can happen a lot quicker than most expect.
- Berkshire Hathaway has returned 61x over the last 30 years.
- Amazon has returned 60x over the last 14 years.
- AMC Entertainment is up 63x over the past 6 months!
The FOMO, or fear of missing out, is real for so many investors (including myself!). This was apparent during GameStop's surge earlier this year. But the lure of piling into a hot stock comes with a massive risk: blowing up your investment portfolio.
To prevent this from happening, my advice to investors who can't resist buying an unprofitable movie theater chain at a $30 billion valuation in hopes that the stock keeps going up is the following: understand that you're gambling, not investing.
Treat AMC stock (or whatever the fad of the month is) like you're playing blackjack at a casino in Las Vegas.
With that mindset, you will fully understand that you can lose all the money you put into the stock quickly, and therefore you are likely to keep your position small. Never put more than 5% of your net worth in a lotto play like AMC (and I'd argue even 5% is too high).
But too often, human greed takes over as people look to strike gold overnight. Even if you timed the AMC move perfectly and collected your 63x return over the past six months, the next time a FOMO trade comes along, you likely won't be able to resist and there's no telling you'll be as lucky as you were the last time around.
Timing the market is incredibly hard. Investing in high quality, boring businesses and holding for the long-term to build generational wealth is also hard, but your chances of success are so much higher.
To not blow up your investment account, dip your toes in the water rather than jumping in head first when buying a FOMO stock you can't resist.
A personal anecdote on this topic.
Last month, Oatly went public. The company sells oat milk, and I have been an obsessed customer for years (tastes great in coffee!). I knew I had to own a few shares given that I hoard their product every time I go to the grocery store.
But the company was able to IPO at a valuation I think is unsustainable: $10 billion. For reference, the company was valued at just $2 billion less than a year ago.
After just a few weeks as a publicly traded company, it's valued at about $15 billion.
Still, I couldn't resist and I had FOMO. Therefore, I purchased only a couple hundred dollars worth of the stock (Disclosure: This is not a recommendation to buy or trade this security).
It's a win-win because I won't lose any sleep if Oatly plummets, but I'll also have some skin in the game and benefit from a rise in the share price, both financially and psychologically, which helps eliminate my FOMO.
If you can't resist chasing a stock that everyone is talking about because it's gone up so much and the FOMO bug takes over, try buying just 1 share, holding for a week, and then re-evaluating. It could save you a big headache (and a lot of money) if the music in these wild stock moves finally ends.
At Ithaca Wealth Management, we focus on investing in high-quality, growing businesses that have a history of continuously innovating. While this process is often boring in the short term, in the long term, it can be incredibly exciting.
Warren Buffett is worth more than $100 billion, but 95% of his wealth was earned after he turned 65.Do you know someone you think would benefit from our low-fees, $0 account minimums, and investment management services? We'd love to help! Refer a FriendIf you enjoyed reading this, you might enjoy this previous writeup on Warren Buffett:
Becoming Warren Buffett
Thanks for reading, and please reach out with any feedback or questions, especially if you are hesitant about investing in the current environment.
Matthew Fox, CMT, MBA
Founder & Wealth Advisor