To us, Jeff is describing what he knows from his years of experience and some call the "psychology of regret". It is also closely related to the concept of a Giffen good in economics. That is an item in which its demand goes up as its price does, like perfume. Cryptos are right now exhibiting Giffen Good qualities because of the press and hype surrounding the launch of futures for sure. This is why it is all the more important to not forget your discipline. When the world is telling you to buy something because it went up, the Fear of Missing Out (FOMO) that Jeff describes so well can be overwhelming.
The message is clear to us. There will be other opportunities, don't chase the last one. Ignore the fact that your next door neighbor who just bought a Rolls with his Bitcoin winnings is just lucky, not good. Stick to your rules, and remember trading, as well as investing, is a marathon, not a sprint. The market will be there tomorrow - Soren K.
GREED and FOMO
Every month, I speak to around a hundred retail investors at a conference in Utah. Over past six months, I’ve been getting pretty much the same two questions. “Where do you think the market will go?” and “Would you invest in Bitcoin?” keep coming up. Both questions are obviously very subjective. The more interesting question, the one that has plagued me at times throughout my career, is about the thought processes of investors. Why do investors find it so compelling to invest in assets and projects where the risks are hard to measure and the probabilities of success are so low? It mainly comes down to two consistent killers of returns, Greed and Fear Of Missing Out (FOMO).
Greed and FOMO have been affecting investors and people outside of the investing world for centuries. That is why get rich quick infomercials still work today. Most of us have an inner desire to catch that one special stock that goes from 50 cents all the way up to 100 dollars. This is the allure of the penny stocks. It is also why bitcoin is getting so much attention today. Yes, it is a new technology that can, maybe, possibly, someday change the world. That’s why Greed and FOMO are kicking in.
Greed and FOMO are the main reasons why certain stocks go parabolic. We like to dig deep into our pasts and remember all the times we wanted to invest in a stock like Apple at $12 in 1997 but didn’t do it. Or when Google broke above $500, and people told you it was overvalued. Or that time you had an opportunity to invest in that start-up with a few of your friends, but you didn’t. They walked away with a few hundred thousand dollars. You do not want to miss out again! Greed and FOMO! That is how we justify buying Boeing at $295 or AMAZON $1165 even after they have both soared over 50% this year.
Ironically, we usually do not recall all the times that we missed out on losing a ton of money. For me, it was Bear Stearns the Friday before it was bought by JP Morgan for $2 a share. By not pulling the trigger at $30.85 a share, I saved myself $200,000. Was I jealous of my friends who invested in an energy drink company when I didn’t? The four of them lost a total of a million dollars because the CEO was stealing money from the company. We have to remind ourselves that when our Greed and FOMO is high, it can cut both ways. More often than not, it usually goes the wrong way.
One thing I have learned over the past 22 years of investing is that there is no need to fear missing out. The 1960s and early 70s had the Nifty Fifty, the 1990s had the Internet, and today we have the FANG stocks. There will always be new opportunities, but they probably won’t be the same companies. [EDIT- And jumping on bandwagons can be detrimental to healthy diversification - Soren K]
To me, there is a difference between investing to make consistent returns and trying to hit that magic home run. There is nothing wrong with home runs. The keys are how you go about it and how much money you allocate to it. This is what I tell anyone who will listen: If you have Greed and FOMO running through your veins, take a very small portion of your overall portfolio and make small bets on these types of ideas. That way, you can satisfy your Greed and FOMO without losing a fortune. Hopefully, over time you will even hit one or two of them and actually make some money.
Read more observations by Jeff Tomasulo HERE