FOMO?
Nothing so undermines your financial judgement as the sight of your neighbour getting rich.
We have long highlighted that short-term market movements, whether it is up or down, should never dictate someone’s investment strategy. We repeated talk about how we should act when the market suddenly drops precipitously — too often, investors run to the sidelines in fear and miss the subsequent recovery.
On the flip side, what needs to be discussed more is how investors should also ignore the euphoria of a sudden surge in the market and the fear of missing out on easy gains. From meme stocks promoted on message boards like Reddit to strange cryptocurrencies like Dogecoin, investors are being swept up in a wave of FOMO (Fear Of Missing Out) and buying seems driven as much by anxiety as by hope.
In a recent interview on Hustle, billionaire investor Stanley Druckenmiller highlighted that he bought Bitcoin after hearing that the majority of the people who owned it never sold out of the asset class when it plummeted -85% in 2018 and also whilst mulling over the purchase, he saw it suddenly double from $3,000 to $6,000. He felt FOMO and jumped in. However he admitted that his “heart was never in it” and cashed out part of his $20M bet after prices skyrocketed. It was not the first time that he joined the bandwagon — in 1999 he bought $6Bn worth of tech stocks, only to lose $3Bn two months later when the tech bubble burst.
Meme stocks such as AMC, Gamestop, and Tesla promoted on Reddit’s now famous wallstreetbets forum have also risen (and fallen) in value tremendously over the past year and a half. Adding the soaring property market to this list, we can see that it is not only crypto that has dramatically risen in value. The social pressure to keep up with neighbours, friends, and “influencers” on social media — seeing them becoming extremely wealthy from a few lucky bets — can make many “go all in” without a further thought. It’s an unfortunate human behavioural bias.
Today’s generation of DIY stock traders have only known market crashes as short-term buying opportunities, with the devastating memories of the 2008 crisis far away in the distance. The renaissance of day trading among individual investors has seen a record rise in new accounts on online brokerage platforms. Cryptocurrencies also have very low barriers to entry and can be easily traded, and there is no end to the deluge of information that one can seek from some “guru” on Twitter, Instagram or even TikTok.
The ripple effects of FOMO can be seen, not from how well AMC or Gamestop are doing as retail entities, but by how the value of financial expertise is slowly eroding away. Investment strategists and financial advisors are feeling the heat from clients to talk about crypto in order to keep up with the times, and avoid appearing uninformed.
It is hard to fight FOMO with plain logic. These days, warning younger investors against risky short-term speculation can be difficult. Urging fundamental tenets of investing such as diversification and market efficiency can be derided as out of touch and labelled “boomerism”. There are far too many cautionary tales of ‘going bust’ to list down, but many of these tales had the same starting point: greed. This can be seen in the recent news where professional and retail investors were ensnared in the nickel trading fraud, cryptocurrency fraud, forex and options trading, structured notes and high yield bonds.
However, we are thankful that the majority of our clients and investors are level-headed individuals who are staying disciplined and avoiding speculation. While history may not repeat itself, it often rhymes. While there is no telling where market momentum may bring the red-hot price of these in-vogue assets now, we have seen how such stories end when one chases after short-term gains.
All that said and done, if you really feel like getting a piece of the action, just remember to ensure that the bulk of your money is in a well-diversified and constructed strategy with quantifiable risk and return expectations. Then take 5 or 10% of your money for that short-term punt. This way, you know that even if your gamble blows up, you or your family won’t be left out on the street.
