Dogecoin has given financial analysis an existential crisis. Why is something that was supposed to be a joke, and that has a potentially unlimited supply, making their investors rich? From a fundamentalist’s perspective, Dogecoin is worthless with nothing going for it, but is that really the case?
Most would probably say no, but hey, why not? People value things that they love, but people value money because we think others do too. Some bought Dogecoin at four cents because it was objectively undervalued, and others bought it because they foresaw the potential for others to see value in it, and thereby profit from their perceived value when selling. Trends investing at its finest.
Fundamentals, indicators, and... social proof?
A popular outlook held by many is that if you’re a real investor, you know the value of what you own because you did your due diligence on the company behind the stock, the strategy behind the fund, or... the purpose and use-case behind the crypto coin. You listened to all the earnings calls, voted, dug through the financials, and even read the 10Q while drinking some strong black coffee.
In fact, this is the mature, intentional, logical way to make a decision on what investments to buy and hold for the long haul. No matter how much their true value is subjective and dependent on social perception, the reality is that we have standards and expectations in place, and “real” value depends on those fundamentals in most cases.
So, just keep an open mind when it comes to what “value” means
Despite how valuable it is to understand a business and attempt to approximate its true worth on the market, we have to understand that even this is arbitrary.
It’s fulfilling to do your research on a company and make a sound, informed decision to buy-in. You learn all about its business model, who’s behind it, calculate their most important valuation ratios yourself, and even light up your chart like a Christmas tree with every indicator you’ve got. All that, just for some stock like $AMC to 10x for no real reason. That’s the power of social proof.
Social proof is behind even the most logical investments
Imagine the most boring and consistent long-term investments out there. Think $SPY, Disney, Vanguard index funds, you name it. Why do they consistently hold value? In part, because investors perceive that they do and expect that they will continue to.
Think about how we attempt to objectively value any given stock or fund on the market. We approximate based on metrics and historical data, comparing it to what’s traditionally been considered “average” or “good” or "safe." This isn’t a problem, but simply how valuing market opportunities works. Growth and small-cap equities tend to be the biggest beneficiaries of the law of social proof, but you can still capitalize off of this as a long-term investor.
It’s a bit scary to think everyone could one day just decide that their money would be better elsewhere, yet it’s a reality. So stay in tune, up-to-date, and put yourself in a position to profit off of society’s unpredictable and sometimes irrational emotions. Holding on to your strongest convictions for the long term is a good place to start.