Patrick McGinnis first coined the concepts of FOMO and FOBO in 2003 when he was an MBA student at Harvard Business School. These daunting acronyms stand for the “fear of missing out” and the “fear of a better option,” respectively. Typically, these phenomena manifest through various forms of individual social anxiety. However, in this article, I wish to discuss how these two pervasive apprehensions also appear during strategic decision-making, using my own investment company S. Ugelstad Invest (SUI) as an example.
SUI is an investment company that was founded 90 years ago, initially as an Oslo-based shipping company and later as a diversified investment firm. Wholly owned by myself, the company is active in five business areas: stocks/bonds/other traded papers, real estate, shipping, ventures, and educational business. Several critical success factors are expected for all businesses’ SUI pursuits:
Reasonably up to speed regarding technology
Realistic agenda that is compatible with the investment expected
Personal commitment through their financial resources regarding all the people in charge of a given project
Preference for businesses that are already up and going (i.e., with some customers, real competitors, actual distribution.)
Ownership ranging from 10 to 49% – We invest in businesses, not run them, while having a potentially significant say in the strategic decisions of a given venture
Existence of an underlying business cycle driving this project’s decision-making so that timing decisions become key
It is through this last criterion that FOMO and FOBO come in. Indeed, a typical business cycle could look like the following:
FOMO appears during the buy/get in stage. I have observed a tendency to engage in a multiplicity of strategic options, sometimes labeled “listening posts.” The negative effects are often devastating: lack of unified focus regarding the firm’s scarce resources and loss of critical time advantages. Management easily ends up spreading itself too thin. Instead, one should abide by the phrase “strategy means choice.”
This FOBO phenomenon manifests itself instead during sales and exit decisions. When things are going well, a natural tendency is to hold out in hopes of even more rewards. One tends to wait, driven by the so common “extrapolative mind.” Regrettably, the result is often that the decision maker waits too long and ends up forgoing a profitable timely exit.
I have observed variations of these types of timing decisions in all of our business areas. The essence of “buying low, selling high” is timing, which may explain how often I have observed FOMO and FOBO. The cycles’ lengths will differ among businesses, of course, which is where specific knowledge about a given business comes in. At SUI, we have found it useful to focus our learning and experience on five business areas so that we might make better-timed decisions. This “in-out/long-short” philosophy comes from SUI’s original shipping background, where timing is all!
Let us now discuss how the FOMO and FOBO phenomena might play out in each of SUI’s five business areas.
FOMO in decision-making relating to:
Stocks and bonds. Typically, people aim to spread the risk exposure and invest in a relatively wide variety of stocks/bonds. The hope is that at least some will become hits. However, in reality, this tends to result in a more “average of the market” result. Instead, to actually analyze a population of stocks more carefully and actually select those few that one might truly believe in might yield better results (of course, it might go the “wrong” way, too) – strategy means choice! However, FOMO thinking often results in the opposite choice.
Real estate. The same processes cause real estate to be rife with FOMO. Additionally, aggressive brokers can accentuate this trap. Brokers are typically good at arguing what one “must” get regarding a deal in case the opportunity vanishes. This phenomenon leads to an investment portfolio consisting of a relatively large set of indistinct real estate projects. Brokers’ incentives worsen these situations, as they are paid for each deal irrespective of its outcome for the buyer.
Shipping. There is a distinction between asset plays (i.e., shipping projects in which the intention is to sell after the shipping market has gone up) and industrial shipping (i.e., projects with an underlying charter guarantee given the income stream for the ship). The FOMO dilemma applies primarily to the asset play category of investments, as the tendency is to invest in many ship projects in hopes that some will pan out.
Ventures. Many investors hope to get in early while a project’s valuation remains reasonable. However, promising new projects that investors are floating around are often led by overoptimistic entrepreneurs. “A good idea” is frequently all entrepreneurs need to demonstrate when asking for investments, and investing in such a context is an art. Regrettably, very few opportunities seem to realize reasonable returns. The saying goes that, to actually reach a reasonable return for one’s overall portfolio, one might have to invest in up to 25 or so companies to achieve the true hit! An educated FOMO-inspired process actually drives decision-making here.
Educational business. This business area has traditionally been the domain of the public sector. Emerging technology, as well as evolving preferences and needs of students, has gradually led to an opening of this sector for private investors to get involved. The main driver is therefore the opening of opportunities due to trend developments without the strong pressures to get involved immediately. Thus, FOMO would typically not play a major role. Instead, the investor’s judgment about the relevant technological developments and changes in student preferences seem more key. The absence of FOMO pressure might very well make this business segment particularly attractive!
FOBO in decision-making relating to:
Stocks and bonds
It is always difficult to sell stocks/bonds. The typical natural instinct is that the market will strengthen further until a potential collapse renders the issue too late! Unfortunately, stock portfolio managers may continue to accentuate this effect since they do not want to diminish the size of their portfolio under management by selling.
2. Real estate
Again, many of the stocks/bonds’ factors above are typically also at play in real estate. However, I must mention two additional factors:
Real estate does not have the tradition of pursuing trading-inspired selling decisions. Instead, projects tend to be maintained for a long time without contemplating taking advantage of a rising market. The market for real estate transactions does not seem to be as well developed as it is for stocks/bonds. This lack of liquidity makes FOBO even stronger!
Regional economic differences also play a role, both when it comes to city and/or regional differences within a given country and between countries. Certain areas just tend to be “hotter.”
3. Shipping
In shipping, the greed factor drives decisions. Owners typically hope for longer and stronger periods of good times. Typically, it is the ship owners and not the ship brokers who tend to concentrate on FOBO, as they are ultimately the decision makers. Only a few tend to listen to brokers’ advice to sell!
4. Ventures
Psychology plays an essential role. When an investor has been surfing an upward wave, it becomes particularly difficult to decide when to get off. Furthermore, it is difficult to decline a call for follow-up investment in new investment rounds so as to avoid becoming diluted. Thus, a given venture might be linked with a succession of new calls for capital through new rounds. Deciding not only not to invest but to exit can instead be seen as giving up; thus, one ignores explicit exit decisions based on assessing when a venture’s business reaches the end of its cycle. The FOBO effect is often strong!
5. Educational business
Regrettably, exits are also difficult in education. However, the reason is different: There simply are not that many interested buyers! We should recognize that this business area is still in its infancy, and the secondhand market is simply not developed. It is sometimes virtually impossible to get out when one wishes to.
As I hope to have shown, FOMO and FOBO are important factors at play, even in varied industries such as the five in which SUI operates. In most cases, the particular stage of a business cycle triggers which of the two factors may occur. Regrettably, as I have illustrated, the FOMO and FOBO traps are difficult to avoid.
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