Admit it, how many of us have heard about the next big investment in the media, the hot new stock or coin or whatever that’s on its way to the moon, and thought to ourselves ‘I better get on the train now before it’s too late! This could be the one!’. Even your friends, who know nothing about investing have jumped on the bandwagon and are making decent returns! It seems like everything around you is telling you that if you put your money into the new hit trend, you could make a fortune!
I’d bet every investor can relate. The dot com bubble? Bitcoin in 2016 anyone? Tesla right now? The ridiculousness that is Game Stop? I know I struggle with it.
Beware of the Bull
We feel this effect most in a bull market. When we’re in a bull market, it’s difficult to see the benefits of having a diverse portfolio and sticking to your strategy when certain sectors and companies are outperforming. Companies in the news and social media are seeing astronomical rises when your portfolio of ETFs, commodities and well researched value and growth companies struggles behind.
FOMO in a bull market is then further exasperated by recency bias. Recency bias is the brains tendency to believe that the future is going to perform based on recent events, rather than historical. Not only do you not want to miss the next bull run, but your brain is working against you making you think its going to happen again and keep going up! We can’t even trust our own brains! Yikes.
Why won’t it pop?
The final nail in the coffin is when you recognise the two points above, hold strong and don’t jump on the band wagon because you know the bubble’s going to burst….. But the bubble keeps on growing.
I remember earlier this year when the Tesla stock price was nearing $250 and we were discussing whether it had the legs to keep going. Some of the guys had already invested and even though I knew the stock was over priced, I didn’t want to miss the buzz. However, I didn’t give into my FOMO, go me! Then just a few short months later, the Tesla stock price was over $800 and is now worth more than all of the other car manufacturers on the planet combined. Let that sink in for a second.
The FOMO hit me hard after that. Could it go higher? Shall I buy now? How did I not see this? Why am I such a terrible investor? Downward spiral into investing despair…..
The problem is, even though on this occasion I was wrong, 9 times out of 10, not jumping on the bandwagon is usually the right call. The 1 time though can give you some serious doubt and can get in your head. Not only is it disheartening to think about the opportunity (and return) missed but it also makes us question our entire investment strategy. That’s the power of FOMO in investing. Damned if you do, damned if you don’t.
Don’t give in to temptation
The key here though is to hold strong and remind yourself of why you need to stick to your strategy.
The main reason we don’t go headfirst onto the bandwagon is because we don’t want to burden ourselves with unnecessary risk. There’s a sweet spot between risk and returns and we know from history that having a diverse portfolio of stocks that follow indexes as well as featuring well researched and thought out value and growth stocks provides the best of both. Not enough risk and your returns will falter, too much risk and you increase your odds of losing it all. At cheapskate, the rule of thumb is, if you’re hearing about it on the news and from your friends, you’ve likely missed the boat. Bummer. If however after some thorough research of the companies fundamentals you still think it’s a good play, then go right ahead! 9 times from 10 though, its not.
People are not that smart
Think you can catch every boom perfectly and make a killing? Great! Let us know your method in the comments below! Problem is, history tell us that statistically, that’s not really possible. History tells us that if you go chasing the big returns, you’re likely going to lose and losing is a no-no. Take it from Warren –
“Rule No.1 – Don’t lose money. Rule No.2 – Never forget rule no.1”– Warren Buffet
The reason for this is, losing has a bigger effect on your portfolio than winning. Take this example:
If you have 10k and lose 20%, you lose 2k and now you have 8k. But to get that 2k back, you now need to earn 25%. Just to get back to 0, you need to earn 5% more than you originally lost. Not good. That’s why you need to win over time a lot more than you lose if you want to reap those compounding returns. You can’t consistently win big, but you can consistently win and that’s what we’re aiming for.
You’ll probably miss the bottom, or top, or both
If you’re going to make a killing by jumping on the bandwagon, then the best time to buy in is right at the bottom and sell at the top. It’s easy to vow that next time a company or a market is trading at an all-time low, you would buy. But would you really? The bottom of a stock or an index is the bottom for a reason. It’s usually because there’s some bad news, or the fundamentals aren’t looking good. For instance, would you really have bought Game Stop in 2019, when they were reporting incredibly poor earnings due to a dying business model, even in a booming market and were on the brink of collapse? Hindsight is 20-20, but to really buy the bottom is to be a contrarian and go against what convention is telling you. In our experience, that’s much harder to do in reality. Same goes for the top, when tesla is on it’s way to Mars, it feels like the money will never end! Will you really risk losing potentially astronomical gains by getting our at the right time?
We say, take the guesswork out of it. 100% buy undervalued companies, but do it based on data and fact. That way, although you’ll miss some crazy outsiders, you’ll be safe in the knowledge that you’ve picked using your head.
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