Beware the dreaded FOMO effect

One of the most dangerous emotional issues in investing is called “FOMO,” or the fear of missing out. It’s probably responsible for a large percentage of losses from investing in things people don’t understand or didn’t at least understand the risks.

Nobody likes missing out on something good or great, especially when someone else didn’t. Maybe it was when your unsophisticated neighbor bought the new Tesla Model S in early 2021 with his tech stock gains. Or last November when you heard about somebody’s $100,000 profit in cryptocurrencies made in less than one month. Or when the kid down the street tells you how he has been making a fortune day trading options on game stocks in his basement.

Oh, come on! Admit it. You were green with envy and wondered if maybe you should be doing more aggressive things with your money. All of a sudden, you were more worried about what you might be missing than what you might risk getting yourself into. That’s FOMO. It’s like the Siren calls to Odysseus, luring him to crash on the rocks.

Over the years, FOMO has sent countless investors to the poorhouse. It ran rampant when the hot pandemic stocks soared upward of 700 percent. Now, these stocks are down more than 90 percent from their peaks. It’s easy to get caught up and invest with the crowd because FOMO is a natural instinct. While a few lucky people caught the wave up, how many sold before the crash back down? Many of the FOMO people couldn’t stand it anymore and got in just as things topped out.

It’s not your fault. It’s how we are wired. Scientists call it our “herd instinct.” This kind of thinking was valuable for our caveman ancestors. Sticking with the herd made sense for them. Go their own way, and they’d end up as a wooly mammoth’s lunch.

But that same FOMO effect has driven many investors into the worst losing investments of our generation. These included Dot-com stocks before the bust in 2000 that saw the Nasdaq plunge 78 percent from its high. Financial companies that were driven by subprime profits before they plunged more than 50 percent during the 2008 financial crisis. And many other fad stocks just from the last couple of years that maybe are now off more than 80 percent from their highs in 2021.

These trends are exciting, promising innovation, and hitting the headlines with plenty of star power. But the writing was on the wall almost every time. The cool word for many of them is “disruptor” companies. Companies whose products or services will change the world and the way we do things. Some of them actually do just that, and people make a fortune. Most, however, just become yesterday’s news. I’m not suggesting that you should not invest in these types of companies. Some of them will do very well. Just know that most don’t, and you need to understand the risks. It’s a tough game to play.

Yet it’s not easy to tune out your FOMO instincts and go against the crowd. I know from personal experience. In 1999 a few rational people wrote, “The internet stock craze will probably go down in market history as a textbook example of a mania.” Whoever wrote that probably caught hell for it, and their readers thought they were crazy.

They said the same thing in 2005 when some warned about the housing bubble three years before it collapsed. Likewise, in 2021 when I warned people to steer clear of meme stocks that became all the rage. Did anybody listen? I hope some did. But I never wavered. I had seen this movie many times before and knew how it ended.

In investing, you need to understand one important fact: “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”
Although Ben Graham, Warren Buffett’s teacher, said it decades ago, it still rings true today.

So what is the alternative? Instead of following the crowd, all you have to do is go in the other direction. Look for “anti-FOMO” stocks in growing industries. Look for the kind that most investors are happy to miss out on. And since most investors dislike them or find them boring, those stocks are usually selling for a huge bargain. Look for solid companies with good earnings and reasonable or bargain prices and sit back and wait. If they pay a nice dividend, that’s even better. You get paid while you wait. Over the long term, the stock price follows the fundamentals of the business, and you make money. And the real bonus is you don’t have to check the price every 5 minutes and worry about what the market did today.

It takes confidence because nothing is guaranteed. When you forget about FOMO and invest in solid companies selling great products or services, the chances of success are much, much greater. That kind of real-world opportunity is what investors should worry about missing out on, even if it means standing against the crowd. Thanks for reading.