The fall of crypto exchange FTX is a brutal lesson in fear and greed. Not the fear of losing but the fear of missing out or FOMO. FTX founder Sam Bankman-Fried (SBM) said this on the podcast “Odd Lots” describing how venture capitalists pick investments (highlighted by Jason Zweig in his WSJ column the “Intelligent Investor”):
You get a bizarre f—ing process that does not look like the paragon of efficient markets that you might expect. [Venture capitalists] see what all their friends are chattering about, and their friends keep talking about this company…and they start FOMOing [feeling the fear of missing out] and then [they] find a way to get into that….
And all the while, you’re like, ‘How do we justify: Is this a good investment?’ Like, all the models are made up…. You’re valuing [companies] off a model built by a person who owns the thing that’s being sold. So, like, of course the number’s going to go up between now and 2025, right? It’s going to go up an arbitrary amount. And you can justify anything.
How about the A-list endorsements? How do they pick investments?
Which makes me wonder: How do you become worth $50 billion? Start with $100 billion. So far this year, tech oligarchs have lost big. But don’t worry, they’ll be able to pay the bills—the AC will still work in their tropical paradise.
But what about teachers’ pensions, 401(k)s, and 529s that were invested in this stuff: NASDAQ, crypto, and its favorite cousin, ESG? Turning $100k in family savings into $50k is life changing. And yet it happens all the time.
When I gave a talk to graduating medical students about investing, I explained the power of compound interest, saving until it hurts, working for as long as you can, and not losing money. When I opened it up to questions, I was asked: “What do you think of bitcoin?”
Action Line: The lesson? Human nature? Greed? FOMO?
Emotions are a terrible foe for EVERY investor to overcome.
When giving investment advice: They’ll never remember you when you’re right, and they’ll never forget you when you’re wrong.
I’m ok being the forgotten man.
