Behavioral Investing and the Fear of Missing Out (FOMO)
Written by the Check Capital Management Team
In the investing realm, emotions often play a bigger role than logic. Changes in the stock market can invoke a powerful behavioral bias known as FOMO, or the fear of missing out. This strong emotion can lead even the most seasoned investors to make irrational decisions, causing them to chase short-term trends and value market hype over solid business fundamentals.
FOMO expresses itself as the feeling that others—perhaps close friends or family—are making money on opportunities that you’re missing. This can lead to the feeling that if you don’t act immediately, you’ll be left behind. Social media, financial news and stories of overnight wealth only add fuel to the fire, pushing individuals to make hasty investment choices without a)proper research, b)consideration of the price paid relative to the respective fundamentals, or c)attention to their personal goals and risk tolerance. Even if you’re enjoying solid investment results, the relative performance of others can make it impossible to appreciate your own success.
Real-World Example of FOMO: The Dot-Com Bubble
In the late 1990s, any company participating in the growth of the internet enjoyed soaring stock prices. As companies scrambled to purchase the equipment necessary for their own e-commerce solutions, a multi-year binge of new orders ensued. Meanwhile, the rhetoric promoted to the investing public surrounding this event was “it will continue for years to come”. As a result, investors rushed in blindly, failing to understand the businesses they owned and the valuation they paid—two extremely dangerous traps.
Consequently, the bubble burst in the spring of 2000 and the technology-heavy NASDAQ index plummeted by an unimaginable 80% over the ensuing two years—wiping out trillions of invested dollars along the way. Many of the companies that enjoyed rocket-shot trajectories a couple years prior ceased to exist by the end of 2002. Businesses lucky enough to survive would not see their stock prices rebound for decades. In fact, one of the darlings of the time, Cisco Systems, has yet to see its price return to its peak in 2000.
How to Spot FOMO in Yourself
Awareness is the first step in overcoming FOMO. If you’re experiencing any of the following feelings, take a step back and reassess:
● I’m falling behind everyone else.
● Everyone is making money except me.
● If I don’t buy now, I’ll miss my chance forever.
● I saw it on social media. Could it be the next big thing?
● I feel anxious when I'm not in the market.
● People are getting rich quickly—I should be too.
Staying Grounded as an Investor: Realize that It’s Temporary
Every market cycle features specific industries that capture a great deal of investor attention and capital. The combination of those two forces can ultimately push the stocks within those industries to extreme levels. During these periods, investors tend to abandon any sense of skepticism and no longer consider the potential for loss. There is also a tendency to forget about the effects of competitive market forces. Whether a company is new or old, it’s subject to the same market forces that have been around since the dawn of free markets. New industries emerge; first movers take market share, enjoying outsized profits and a rising stock price…temporarily. Competition eventually arrives, margins compress and demand (for their products) begins to shrink. The cycle then reverses, stock prices plunge—some to dreadful depths—and only the strongest, most well-capitalized companies survive. This pattern repeats, cycle after inevitable cycle.
To avoid falling victim to FOMO, it’s essential to have a clear investment plan and stick to it. Here are a few strategies:
● Have a clear investment philosophy that doesn’t change with the tides. Markets are dynamic and industries will lead/lag at various times. This doesn’t mean your philosophy must change.
● Don’t rely on hype or hearsay. Selling out of reasonably priced stocks that might be temporarily out of favor to then purchase stocks that are in-favor and trading at high valuations, might be the quintessential FOMO reaction.
● Diversify your investments. Avoid putting all your money into one "hot" opportunity.
● Think long term. True wealth is usually built over time, not overnight. Investing is a marathon, not a sprint.
● Disconnect from the noise. Social media can amplify FOMO—limit exposure if it affects your decision-making.
Learn from “The Best”
Let me tell you a story from the late '90s about someone spectacularly famous who, despite his fame, received almost no credibility for several years. During the years 1997-1999, this investor returned the following: +34.9%, +52.2%, (19.9%). Yet, during the same period, the NASDAQ returned: +21.6%, +39.6%, +85.5%. The internet boom years were upon us! Many hypothesized that the investor had either lost his mind or was totally oblivious to the new internet paradigm—or both. Fast forward to 2000-2002. While the NASDAQ was shedding 80% of its value, this investor enjoyed +30% returns. Who was that legendary investor? None other than Warren Buffett!
Final Thoughts
It’s difficult to remain disciplined when others are gleefully advertising their investment success or are acting hysterical out of fear. The skill required to set aside personal biases and distinguish truth from market noise takes decades to develop. This is precisely why one of the greatest benefits of working with a professional money-management firm is the rational thinking it can provide. This is the standard we practice every day at Check Capital.
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