How To Avoid Investing FOMO

follow-the-crowd

Investing FOMO (fear of missing out) is something that can affect both new and experienced investors alike.

Even minds as great as Isaac Newton have suffered from it. Newton famously sold at a profit in the South Sea bubble, before FOMO gripped him and pulled him back into the market mania, where he lost £20,000.

There is nothing wrong with following a trend or buying an undervalued asset and watching it ride to giddy heights while prudently taking profits along the way.

But jumping in and chasing an asset higher, following the crowds and the hype, when it has already reached an overvalued price is the path to big losses.

It is difficult to emotionally discipline yourself to sit on the side-lines while you watch a popular asset run hot.

In fact, research has shown that humans are more afraid 0f performing poorly relative to their peers, than they are of an investment loss.

That is why it is easy to fall victim to the herd mentality with investing. We would rather risk a loss than see our friends and colleagues make a lot money on a big risk while we sit out.

Research done by the Financial Markets Authority in New Zealand found that 31% of people have invested because of FOMO.

new-zealand-sheep
Unless Kiwis have a greater herd like behaviour (which to be fair we might) I would hazard a guess that the findings would be similar in most parts of the world.

If you want to be part of the 69% who don’t have investing FOMO then follow the suggestions below.

Assess Risk and Return

There is nothing wrong with jumping on a trend but you need to do a proper analysis of risk adjusted return.

Investing with the trend behind you is a very good thing. In fact, the best time for a contrarian value investor to invest is during the very early part of an uptrend. When the formerly falling market has carved a bottom and the technical analysis supports a reversal and a new upwards trend.

This does mean you will miss buying at the very bottom, but, you will also avoid the risk of further losses.

You can still buy further up the trend as long as you do a proper fundamental analysis and buy with a cool head.

The problem with FOMO is not so much the price entry point, the problem is that people tend to disregard all analysis, both fundamental and technical, and invest with fear and emotion.

That is the dangerous part.

Consider Whether You Are Investing Because Of Media Hype

If you are investing because of media hype then that is often a signal that you are late to the party and the top might be near.

The best value investments come in unloved, if not hated markets, where the media is either absent or derogatory.

In this environment anybody who follows the media narrative will be a seller. Once all the sellers have sold there is no room for the price to drop further and the market will soon reverse.

When the media is hyping up an asset class and you are feeling like FOMOing in, consider that there are many other people like you who might jump on board for the exact same reason.

While that can push an asset to a mania top, understand that people who know the sector well and who invested long before you did are the ones who will be selling to you. They will be taking profits while you will be buying into greed.

Once all the people who buy on the media hype have finished buying then there will be no one left to bid up the price and the market will fall.

Lauren Templeton, in her book about her uncle, Sir John Templeton, gives the example of the headline that ran in the Wall Street Journal on the day the tech bubble peaked:

“An article ran that day in The Wall Street Journal, as the NASDAQ peaked, that was titled “Conservative Investors Warm Up to Idea That Tech Sector Isn’t a Fad.” The most unforgiving bargain hunters would call this a heavy dose of poetic justice, as the article profiled investors who had been married to conservative investing only to jump ship at the last moment and get into the tech stock casino. “

So if you catch yourself investing because of media hype then stop and pause. Do a proper fundamental and technical analysis. Chances are you will be better sitting this one out.

FOMO Is A Sign Of The Mania Phase

Markets have very predictable cycles based on market psychology.

At the top of the market there is a mania phase where the price of an asset is driven by hype and greed.

Both hype and greed fuel FOMO as investors jump into the market one after the other and drive it higher right before it tops, buying when the smart money that bought lower is exiting before a downturn.

If you understand this market psychology it can help you resist FOMO because you can have the self-awareness to recognise the big risk you are taking.

Accept That You Won’t Pick Every Winner

It is not possible to pick every winner, in every sector, in every market, in every year.

Yet the FOMO hits hard when you watch something rise and think, “I should have bought that. Why didn’t I buy that. Should I buy it now?”

Or if you did buy it you think, “I was so smart. Why didn’t I invest more?”

I have had to guard myself against that thinking in the two crypto bull markets I have participated in. Random altcoins pump all the time and I can get frustrated if I missed out. And it often seems obvious in hindsight that they would pump, especially those that have good technology and a good community.

But I can’t track every ecosystem and every project. And even if I could it would be imprudent to invest too much in any one altcoin.

Eventually you just have to accept that this is par for the course for investing. The aim is not to buy every bottom, sell every top and pick every winner.

The aim is to consistently buy low, sell high and make a real return that is appropriate for the level of risk you took and your financial goals.

Investing is based on probabilities not certainties. Therefore managing your risk means missing out on winners. That’s the price you pay for longevity in the market.

When you make peace with that, you can watch the winners fly knowing that you stuck to your plan, managed your risk and shouldn’t expect yourself to be able to perform the impossible.

Remember You Invest Based On Probabilities

Let’s say you considered buying something but chose not to because the risk was too high.

Then it massively appreciated in price.

That doesn’t mean you were wrong.

Hindsight may tempt you to think you were wrong, but you probably had very good reason not to invest and to sit it out. In this case it just defied the odds and rose anyway.

You invest based on probability and risk adjusted reward. Not on certainty and hindsight.

The fact that it pumped doesn’t mean you were wrong in your probability calculation. If you FOMO in after it has appreciated in price then you are taking even a bigger risk than you would have if you bought at the first opportunity.

A great example of this is mining stocks. I only invest in producers and not explorers. That’s because producers have a proven asset and are lower risk. Explorers are hit or miss. Often I come across explorers where I am tempted to buy but I never do because it’s one of my rules. There is too much risk.

Whenever I see an explorer pump on a successful drill I get a twinge of regret. However, I don’t FOMO in at that point because I know I was right to stay out in the first place based on my own investing parameters. Plus the market has already priced in the discovery so it often makes zero sense to invest at that point.

Contrarian Investing Means Going Against The Crowd

Successful contrarian investing requires you to buy when the market is depressed and sell when the market is buoyant.

This requires you to be out of step with the majority of investors.

Going against the crowd is very hard to do. It goes against our very natural herd instinct and safety in numbers mentality. The herd mentality tempts us to FOMO.

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Investing against the herd is difficult

Instead, you have to recognise that when you feel FOMO you are being tempted to invest with the herd. And investing with the herd is not a successful strategy. When you feel FOMO it often means the top is near because once the last remaining buyers buy in the hype there will be no one left to bid up the price.

If you buy when the sentiment is down and all the sellers have been flushed out of the market it is a safer and more profitable option.

This is hard to do and will feel uncomfortable.

But this is a good sign.

As Warren Buffett says:

“Be fearful when others are greedy and greedy when others are fearful.”

Have A Plan

One of the best ways to avoid emotional FOMO investing is to have a plan.

Stick to the plan in good times and bad, in euphoric and depressed times.

This takes the emotion out of the game and forces you to be disciplined.

The more you have a system and some investing rules the easier it is to ignore impulses that you might later regret.

Sleep On It

If you are tempted to throw money at an asset without doing your homework then step back and sleep on it.

For several days if you can.

Do your research, look for alternative perspectives and let your emotions come back down to earth. If you still want to buy it in a few days then go for it.

The stock market normally doesn’t move so quickly that you can’t wait a few days.

Sometimes the crypto market can move so quickly that days do matter, but chasing prices higher is dangerous. Fast moves up should give you even more caution since they can come down just as rapidly.

If a big move up has you catching FOMO, then sitting out for a few days might actually give you the opportunity to act in a more level headed way.

It could also give you a better entry price.

Dollar Cost Average

Dollar cost averaging is when you purchase an asset at different intervals thus at different price points.

This way you will inevitably buy a portion at a higher price, a portion at a lower price and some in between.

If you are about to FOMO in on an investment and you can’t hold back at all, then consider spending just a portion of your investable capital. Leave the remainder behind to dollar cost average in over time.

Unless the market is racing higher, in which case you should be very careful not to chase it, pausing to allow yourself to dollar cost average gives you time to think and gives you time to potentially capture a lower entry price.

Wherever the price goes, if you dollar cost average you take emotion out of the equation.

Get Professional Advice

Professional advisors are worth it.

Sure they have a reputation of being conservative, but that is what you need if you are at risk of investment FOMO.

Professionals understand that slow and steady but consistent returns are the key to building long term wealth. Whereas, chasing rising asset prices higher is a path to ruin.

It can be a very prudent move to use a professional.

That doesn’t mean you can’t keep a portion of your money to invest yourself, especially if you want to go to places the professionals won’t like small caps or crypto.

But for big money that you can’t afford to lose, using a professional takes the emotion out of it. Professional advice adds a heavy dose of conservative realism which is needed to counter FOMO.

Look Forward To Underappreciated Undervalued Markets

Whenever one market is running hot and drawing all the eyeballs of the media and most retail investors there will be some other beaten down unloved market somewhere else.

So rather than FOMOing in on what’s hot, focus your energy on finding and learning about whatever market is undervalued.

That is where you should put your money.

If you invest based on FOMO you are constantly looking to the past. To what was previously undervalued and has now run up and is making news.

You want to be ahead of all that attention by looking to the future. Invest in something that seems dead now but will be the next thing everyone turns their attention to it.

Thinking in this way will help you resist the temptation to dive into whatever is hot right now.

Studying Benjamin Graham helps with developing your value investor mentality.

Conclusion

Investing FOMO is real and there is nothing wrong with you if you feel it.

It is the natural human instinct to fit in, follow the crowd and do whatever our peers are doing. Even if it is to our detriment.

It takes wisdom to recognise the emotional temptation of FOMO. Courage to avoid acting on it. And intellect to redirect your attention to a more fruitful opportunity in another asset.

Recognising investing FOMO is half the battle. However, if you have a plan, keep your head, practice emotional discipline and properly assess risk then you should be able to avoid making costly mistakes.


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Sources

DeMarzo, Peter, Ron Kaniel, and Ilan Kremer. “Technological Innovation and Real Investment Booms and Busts.” Journal of Financial Economics 85, no. 3 (September 2007): 735–54. https://doi.org/10.1016/j.jfineco.2006.07.003.

Templeton, Lauren C, and Scott Phillips. Investing the Templeton Way : The Market-Beating Strategies of Value Investing’s Legendary Bargain Hunter. New York: Mcgraw-Hill, 2008.

Image Credits

Railway Station From Above by Timon Studler on Unsplash

Flock of Sheep by Andrea Lightfoot on Unsplash

The Wall Street Journal

Wildebeest by Sutirta Budiman on Unsplash

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