One of the most basic principles of investing is to buy low, sell high. Generally this is easier said than done. When you do sell a stock, or any asset, there is generally someone on the other side who believes that the price of that asset is going to increase, even if you think that asset has peaked, or you just want to move your money somewhere else.
Take for instance the recent price action in Gamestop, something I had previously written about here. Back in late January – early February, the stock was going from the $10 – $20 dollar range, up to around $350 in a matter of days. The initial interest was driven by short sellers, who were looking to screw over the hedge funds who had shorted the stock many times over, a noble cause indeed. However, I also think that a lot of the later price action has been driven by investors fearing missing out on the next big thing, hence, they buy the stock at prices where the fundamentals make no sense.
Fear is designed to be reacted to. Sometimes that fear can be a good thing, other times that fear can hold you back. Fear of missing out, however, can cause me to act irrationally, and say, invest in Gamestop.
The Role of Fear in Investing
Fear of missing out can be a powerful motive for people to do things they otherwise wouldn’t want to do. In terms of investing, if everyone else is getting rich, why would you want to remain poor? Hence, people will jump on the bandwagon so they can be rich like everyone else. At a certain point, fear becomes greed.
Those who had purchased Gamestop back in December, in the $10 – $20 range are now doing pretty well, even if the stock is down a bit from its highs. I’m pretty sure most investors, myself included, would have loved to know back in December that the stock was about to do what it did in January and February, and indeed, some people did get really rich during that period.
While some are getting rich, others are looking at them and thinking, “wait a minute, I can be rich too, if only I invest in XYZ”. This is most effective though before company XYZ has its massive price increases.
One of the risks though of following the stocks that everyone is piling into is that you are now investing into a bubble, which could potentially wipe out the investors left behind when they burst. So, ideally, when investing in a bubble, you would get in the day before it starts running up, December in the case of Gamestop, and get out the day before they burst. Those people should make a killing.
Problem is, without a crystal ball, or insider information, it is impossible to tell for sure when these bubbles are about to form, and when they are about to burst. Therefore, we are left to guess based on the information that is available.
Fear, combined with greed, can drive people into those bubbles. As someone who first started investing in the late 90’s, we had this brand new thing called the internet. The internet created a whole slew of companies that had giant valuations, but no workable business plan. Or, in many cases, a company may have had a business plan, but it turned out they were a few decades ahead of themselves.
I could have gone into Pets.com, a website designed to cater to pet needs, or I could have invested in some upstart bookseller, Amazon.com. Back in the 90’s both companies would have been bubbles, however, one no longer exists, the other is now one of the largest companies in the world in market cap. Both companies were creating a fear of missing out among investors.
If someone had gotten into Pets.com, they would have been wiped out in the companies demise. In the case of Amazon, they were certainly hit by the dot com bubble bursting in the early 00’s, but they were able to adjust their business model to something better, something way beyond their original book store. They not only came back from the dot com bust, but then went on to become greater than ever.
In this case, the fear of missing out among Amazon investors was legitimate. People who invested in that company, and stuck with it, have made their return hundreds of times over. In the case of Pets.com, however, the only thing I missed out on was getting wiped out.
Its Not Going to Happen
Perfect timing for investments, getting in and out at just the right moment, is just not going to happen. Perhaps if I did buy Gamestop back in December, if I sold today, I would have done quite well. However, there is that fear that the euphoria around the stock could drive it higher, and if Gamestop hypothetically did go higher, I would be missing out on that. Having the perfect entry and exit from an asset I need to acknowledge is just not going to happen.
Likewise, there is no way to distinguish the Pets.com from the Amazons. If fear drove you into one of those companies back then, you would be either extremely rich, or wiped out. Needless to say, fear of investing into a bubble, as well as my newness in investing kept me out of both back in the 90’s.
What I can best hope for is that I buy assets at lower prices than I ultimately sell them. Sometimes this can result in me holding onto things much longer than I should, hoping that a poor investment eventually becomes a good investment, and that I don’t miss out on any future potential gains. Other times I hold on to successful investments for longer than I should have, with the fear being that the company is going to go up as soon as I sell.
Fueled by Regret
I often ask myself what would have happened had I gotten into Bitcoin back in the early 2010’s instead of when I did. Sure, I could have my retirement nest egg now if I played that right, and this would be a blog about my life as a perpetual traveler, rather than a blog about me trying to save for retirement with occasional blurbs about travel. On the other hand, I could have left my cryptocurrency with Mt Gox, the largest exchange in the world at that time, and been left with nothing when they folded.
FOMO can apply to life as well as investing. What if I had been socially more active as a kid. What if I did actually put in the effort in school to be an A/B student instead of the C student that I was? There’s really no way to go back and change those things. Trying to catch the next big thing is not going to change what happened in the past. Sure, I can take steps to change, but FOMO is not a particularly healthy motive for change. Fear of missing out and regret can motivate one to act irrationally, and do things they probably shouldn’t do. In terms of investments, fear can motivate someone to go into a company like Gamestop at its current price levels, which, I might be wrong, but on the all and all, doesn’t seem like a financially sound decision.
Learning from my Mistakes
There is a saying that those who do not learn from their past are doomed to repeat it. While there are lessons I can learn from my past, how do I apply them? Certainly making the same money losing trades over and over again is something that should be avoided. And when I make a bad trade, there may be a lesson somewhere in there, but how do I apply it? How do I prevent those lessons from paralyzing me as an investor, or keep me from jumping into every hot new thing that’s coming out?
If trying to learn from my mistakes causes too much fear, I could react by putting all of my money in an FDIC insured account and living with the .01% interest. The only risk is losing to inflation, which is guaranteed to happen, so its more of a know fact than a risk. And you are essentially accepting zero reward.
The fear of missing out needs to be balanced out with the fear of doing too much. Fear of taking action needs to be balanced with the fear of missing out in investing as well as life in general.
Disclaimer: Investing involves risks, and nothing in this post should be construed as financial advice. Risk of investments includes the loss of principal, which I can’t assume liability for. Please consult with an actual financial advisor for advice.