The power of FOMO

    One lovely summer afternoon in the 1970s - back when dinosaurs still roamed the Earth -  Bag was dragged to the local K-mart by his mother for an afternoon of shopping. As a child then, and still today, Bag would much rather spend an afternoon in a dental chair than wander aimlessly through aisle after aisle of crap designed to separate us from whatever cash we have managed to squirrel away. But I digress… As Bag was meandering through the household aisle, watching his mom weigh the merits of various laundry baskets, he was suddenly blessed to witness the power of psychology. There was a voice over the loudspeaker announcing:

  “Attention, Kmart shoppers! We have a blue light special in Aisle 11. For the next 15 minutes - the large bottles of Johnson & Johnson shampoo, normally a dollar each, will be selling 5 for a dollar - while supplies last.”

  Just like that, we were racing 70-year-old Grandmothers over to the Health & Beauty aisle and scooping up as many shampoo bottles as we could get our hands on. If you have ever watched Pigs feeding at a trough, you will have an idea of what blue-light specials were like, back in the day. It was a world-class marketing gimmick.  Even to a child like myself, watching ordinary people play tug of war with the last bottle on the shelf was lunacy.

  Tapping into the psyche of consumers was key to the success of those blue light specials. It preyed on people’s fear - the fear of missing out (FOMO). We didn’t need shampoo, nor did we intend to buy shampoo when we left the house; yet there we were with a cart full of it, headed to the checkout line.  FOMO has the effect of turning, an otherwise normal individual into an irrational being. They become a slave to their emotions and, consequently, are easily controlled - like a puppet.

    There is no place in modern society where FOMO is more widespread than in the stock market.  Consider two companies, both household names and both leaders in their industries.

                                                        Company A    ….   Company B

Earnings last 12 months                  $2.80                      $2.78

Gross sales/share                            $20.07                   $20.99

Book Value                                        $12.51                     $17.13

Dividends                                           None                       7.11%

  You would think company B would trade at a significant premium to company A. After all, their earnings & sales are nearly identical- company B sports the higher book value AND returns 7% to investors every year in the form of dividends (which they have raised yearly for decades). Yet, at the time this was written, Company A, which we will call Tesla, is trading at $225/share. Company B, which we will call AT&T, is trading below “book” at $15.

  Just so you don’t think Bag is unfairly picking on Tesla, Let’s consider two more companies, again both household names & both leaders in their industry.

                                                           Company C  ….    Company D

Earnings last 12 months                      $5.48                   $5.29

Gross sales/share                                $23.03                $32.15

Book Value                                            $3.68                  $20.88

Dividends                                               .65%                    7.17%

   Once again, you would think company D would trade at a premium to company C. The earnings are near identical, but company D has six times the book value of C and pays over ten times the dividend. At the time this was written, Company C, which we will call Apple, is trading at $145/share. Company D, which we call Verizon, is trading at $37/share.

  The point of these comparisons is to recognize the stock price of the Teslas & Apples are where they are, because of FOMO, nothing more. Their prices are completely irrational, not justified by the underlying financials in any way. On the flip side, the telecoms (AT&T and Verizon) are grossly underpriced relative to the market, and by almost any financial metric you want to use. Bag would argue that telecoms have the better business model than both Tesla & Apple in that they get recurring revenue on a monthly basis from all their clients - while Tesla & Apple must rely on new sales. Let’s not forget we live in a world where most of today’s youth will go without food before they give up their phones. This means the telecoms have pricing power, the kind of power inflation can’t touch.

   If you listen closely, you can hear the announcer … “Attention stock market shoppers; we have a Blue light special in the Telecom aisle. We are now selling AT&T below book at $15 and Verizon at a generational low of $37. Get them while supplies last!!”

  As always, Bag recommends you do your own research. But make no mistake, Bag will be one of the pigs at the Telecom trough; in fact, that looks like him in the middle.