Getting Rid of Investing FOMO
Key Takeaways
The fear of missing out (FOMO) can be disastrous as it pushes you into thinking very short-term and with dollar signs the only target in mind.
When you remove FOMO and other emotions from investing, what is the result?
You only care about your own goals and nobody else’s. After all, that guy buying all those high yield bonds or private equity funds has very different needs from you.
You don’t care about what that billionaire, social influencer or your friends say — because their risk tolerance and returns expectations are very different from you.
You tend to think in your own investment timeframe — and not through someone else’s eyes.
Nothing so undermines your financial judgement as the sight of your neighbor getting rich.
— J.P. Morgan
State owned investment company Temasek recently released their annual report, posting a S$7.3B loss, stemming mainly from investment losses and write-downs. The company also reported a negative “Total Shareholder Return”. However because they chose to have a different reporting standard from normal annualised investment gains or CAGR, it is hard to assess the actual figures. Nevertheless, it is likely that some of the losses came from the FTX debacle.
This is not the first time that investors have lost all their money in a fraudulent investment. However, hedge funds, venture-capital firms and other professional investors are paid handsomely for their purported skill in judging the potential of businesses and doing the proper due diligence. Yet many large firms, such as Temasek, Softbank, Sequoia Capital, Third Point and Tiger Global, all missed the red flags - many of them glaringly obvious.
How did it happen? For one, this saga occurred around the same time as the incredible bull market in the crypto industry and everything related to it. Investors who were not invested in this new technology were seen as old-fashioned, outdated and “behind the times”; us included. So for those who missed out the initial rally in digital assets, FOMO sank in.
A unique thing about finance, investing and money is that it usually requires traits contrary to normal life skills, as we have highlighted numerous times before (“How to be a Better Investor”, “Important Lessons From a Humble Janitor”)
Amongst all the bad habits that most investors exhibit (even professional ones) is the fear of missing out (FOMO). Like the quote by JP Morgan at the beginning of the article, you see someone else making it big and you think “I’m smarter, why can’t I do it too?”. FOMO can be disastrous as it pushes you into thinking very short-term and with dollar signs the only target in mind. Logic goes out the window and like what English philosopher Samuel Coleridge said, we get into a willing suspension of disbelief. This is the main reason why asset bubbles occur.
The recent rise in AI stocks may be the beginning of a new bubble, or maybe it’s not. But it won’t be the last bubble that would ever happen. We can trace the beginnings of the first bubble back more than 400 years ago with the Dutch tulip mania. It was then followed by the South Sea bubble in the 1700s which also ensnared brilliant people like Isaac Newton. This was then followed by the railroad mania of the 1800s and another one in the early 1900s.
A chart of the most recent bubbles is shown below - with the latest crypto craze shown in red.
So when you remove FOMO and other emotions from investing, what is the result?
You only care about your own goals and nobody else’s. After all, that guy buying all those high yield bonds or private equity funds has very different needs from you.
You don’t care about what that billionaire, social influencer or your friends say — because their risk tolerance and returns expectations are very different from you.
You tend to think in your own investment timeframe — and not through someone else’s eyes.
Having a well thought-out and well constructed investment plan also helps keep you on the straight and narrow. It also helps to lay out all the possible pitfalls and caters for contingencies along the way. This is the reason why we encourage all our clients to undertake this process together with us.
If you would like to find out more about our entire wealth management process and would like a second opinion on how to do things better - especially in the area of investing and financial planning, come and have a chat with us.
