One of the biggest detractors to investment performance is FOMO or Fear Of Missing Out syndrome. This is when you make an investment, whether it be stocks or any other asset, simply because you do not want to miss out on the possible gains it makes. You do not want to miss out on the gains therefore you buy something out of fear of missing out as opposed to being rational and looking at the numbers.
Buying assets just because you fear missing out on the gains does sound stupid but it occurs more often than people like to admit. It happened in the dot-com bubble where people were investing just because their friends and coworkers were. The fear of missing out syndrome hit once again during the housing bubble as novices were keen to slip houses without having any knowledge of the market. And we all know what happened in both instances. Most lost life savings because of this FOMO or greed mentality.
FOMO is largely driven by heard mentality. People think just because Peter or Paul is making money in the markets, they need to as well. This leads many people to buy into stocks they don’t understand. As I’ve mentioned countless times, to consistently make money on the stock market you need to understand the underlying business. Stocks are not just ticker symbols which go up and down on a whim. They are ownership stakes of actual businesses. You need to understand how a company makes money. This way you can calculate intrinsic value and know when to profitably buy or sell. If you can’t calculate the intrinsic vale or the businesses worth, you are most likely to buy high and sell low and lose a ton of money in the processes.
With the recent surge of stock markets to new highs on both sides of the Atlantic, now is a good time to remind ourselves not to get caught up by over-stretching ourselves. Now is not the time to be overly greedy. With stock markets reaching new all time highs on a weekly basis, there is this irrational fear that many of us would lose out on any gains. There is this fear that we will miss out whilst all around us people are making money.
I need to remind myself why holding cash is important. I need to reming myself that I should not be afraid of sitting on cash which earns 0%. I need to remind myself that cash acts as dry power so that I can pounce when certain stocks reach once in a decade price; like I did with Royal Dutch Shell and Zambeef. I need to remind myself to be patent and think long-term.
Another mechanism I use to get over this irrational fear of missing out as stocks go higher is my monthly stock purchase programme. This way I am able to buy shares at regular monthly intervals. So as prices go higher, I don’t kick myself for not buying. And if the prices of the companies I am interested in fall, even better as I have cash on the sidelines ready to pounce on the opportunity.