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07/10/20203 mins

Why FOMO’s a NONO

When we were all confined to our homes during the lockdown, some people remarked on the absence of FOMO –fear of missing out. After all, there just weren’t any social occasions to miss. With lockdown(s) potentially returning as Covid cases rise, FOMO may continue to be absent during the traditional Christmas party season. But the phenomenon is still alive and well in stockmarkets.

One classic example is Nikola. Following its initial public offering in June, this Nasdaq-listed company quickly achieved an eye-watering valuation of $34 billion. The company claimed to be developing hydrogen fuel cell powered, zero carbon emission trucks. With this claim, Nikola combined two of the market’s favourite themes: environmental solutions and new technology. Investors piled in. What’s not to like?

Well, quite a bit, it appears. A report published last month by Hindenburg Research, a short-seller, alleges that much of Nikola’s progress has been exaggerated or confected. Most strikingly, a publicity video showing a Nikola truck driving along the highway was ‘faked’; the vehicle was merely rolling down a very long slope. The allegations spurred investigations from US authorities and brought a swift end to founder and executive chairman Trevor Milton’s role at the company. Needless to say, the share price collapsed as plain old fear replaced fear of missing out.

We’ve seen this happen before, of course. In the late 1990s, FOMO-driven investors piled into dubious dotcoms – even though many of them lacked products, profits or even realistic projections. We know how that ended. Nikola echoes the dotcom bubble in another way too. The company achieved its Nasdaq listing by merging with a special purpose acquisition company (SPAC) – a sort of shell company. This is a manoeuvre that was commonly employed during the dotcom bubble, as it allowed companies to avoid the regulatory scrutiny normally required when listing.

Even before Hindenburg’s revelations, there were plenty of reasons to be wary. Nikola had zero revenue in 2019 and has no revenue projected for this year either. It did not even have a factory. Nikola is not so much a manufacturer, then, as a myth. But it’s a myth that too many were ready to believe. Stockmarket history is littered with examples of seemingly wonderful products that ultimately turn out to be a ‘fake it till you make it’ let down. A notable example is that of Theranos with its non-existent blood testing technology. More recently, electronic payments company Wirecard’s growth was revealed to be not quite what it seemed when a major accounting ‘black hole’ was discovered. Investors would be wise to apply a healthy degree of scepticism to bold promises. However, FOMO can be a powerful draw.

Some might see parallels between Nikola and Tesla. While Tesla has converted its ideas into production and sales, both vehicle companies have a charismatic founder with a tendency to set audacious goals that may not be fully delivered. At Tesla’s ‘Battery Day’ in September, Elon Musk disappointed investors by acknowledging that mass production of the company’s electric batteries was some years off.

There’s no doubt that some of the self-styled disruptors will ultimately prove to be viable businesses. But at the moment, we see many overvalued companies whose prospects are too vague to be considered as long-term investments. So, like those who actually enjoyed the lockdown, we’re content to shrug our shoulders in the direction of FOMO – and, in the case of companies like Nikola, we’re more than happy to miss out.

This article has been published in Investment Trust Insider.

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations.

The Scottish Investment Trust PLC has a long-term policy of borrowing money to invest in equities in the expectation that this will improve returns for shareholders. However, should markets fall these borrowings would magnify any losses on these investments. This may mean you get back nothing at all.

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