Overview
Let’s start with a simple thought exercise: how do you feel whenever you are left behind?
Whether it’s something as small as missing the bus, or choosing not to pursue post-secondary education while the rest of your peers do, what thoughts cross your mind during these times when the world moves on without you?
Like most people, being left behind, or the thought of being left behind, is an unpleasant experience, and something most people try their best to avoid.
People constantly endeavour to keep up with the times, caught up in a never-ending pursuit of staying abreast with everyone else.
This fear of being left behind is commonly expressed in a simple acronym: “FOMO”, the Fear Of Missing Out. A quick google search shows that this acronym has been discussed extensively.
FOMO can permeate many aspects of our lives, including our ability to make logical investment decisions.
Investors will always have to deal with the perpetual struggle of keeping their emotions at bay. FOMO is a very powerful emotional response that can easily lead investors down a path of financial ruin.
The Danger of FOMO When Making Investment Decisions
Imagine you are a new investor in the 1990s.
Around this time, the internet was still in its infancy. Like any new technology, it will always attract its fair share of optimists and pessimists.
During this time, you get wind of the hot investing trend of the day: dot-com companies. The internet optimists triumphed over the naysayers, and the potential of the internet was being heralded as another testament to humanity’s relentless pursuit of progress.
Suddenly, any company that is affiliated with the internet, even by simply having a “.com” suffix in its name, became publicly traded the next day.
All of a sudden, droves of people enter the stock market hoping to seize their own fortunes, as if a new gold rush had just started.
As a new investor, you are constantly told stories of people who became millionaires seemingly overnight, and all it took was to buy some shares of a popular internet company.
Surely you don’t want to be the loser who missed out on a once-in-a-lifetime opportunity to make some easy money, right?
Fast forward to today. The dot-com bubble has been analyzed extensively, and everyone knows what happened when the dot-com bubble inevitably bursts.
FOMO is such a serious threat to investors because it causes them to make incredibly rash and uninformed decisions.
To an investor caught up in FOMO, it doesn’t matter what the decision or action may be, all that matters is they don’t get left in the dust. Any sort of rational thinking and common sense suddenly ceases to exist.
From what I’ve observed, FOMO is not that much different from herd mentality. An investor who succumbs to FOMO does so because “everyone else is doing so”. In both instances, people don’t want to be the odd one out.
Just because everyone is flocking to a certain investment does not mean it is a good fit for your portfolio and your investment goals. Nor does it automatically mean it is a good investment – financial history has proven this point repeatedly.
FOMO causes investors to make investments in endeavours they don’t fully understand, or only have a cursory understanding of (e.g. dot-com bubble and subprime mortgage-backed securities).
Remember, there is a very clear difference between investment and speculation. Buying a certain “investment” just because everyone else is doing so without having done your own analysis is a textbook example of speculating.
Why FOMO in Investing Exists
In my experience, the reason why FOMO is such a persistent issue for investors is that they have a scarcity mindset.
Excellent investment opportunities do not happen regularly. When economic conditions are strong, investment markets around the world are just as robust. This means very few high-quality investments are selling at attractive prices.
Not only that, but with respect to securities investments, only a handful of companies go on to become industry superstars.
Everyone wants to find the next Amazon, or the next Microsoft, or the next Tesla. Investors who put their money into these companies many years ago are patting themselves on the back today.
Nobody wants to overpay for an investment, nor does anyone want to put their money into an enterprise that will ultimately fail.
Investors who adopt a scarcity mentality believe that everything is limited. To them, their chances of success are limited because everything else is limited. The number of investors who go on to succeed is, in their mind’s eye, limited.
They believe that there are only a handful of attractive buying opportunities left before the world enters a perma-bull market. They believe that no future companies can ever reach the success achieved by today’s industry titans.
They believe that unless they act right now, regardless of how reckless or uninformed a decision may be, they will never succeed as investors.
Because of this mindset, they cannot afford to miss even a single opportunity. “No” is never an answer. As a result, they try their hardest to keep up with other investors, not because they want to get ahead, but because they don’t want to be left behind.
How to Prevent FOMO
If FOMO is the result of having a scarcity mindset, then the logical solution is to adapt the opposite: an abundance mindset.
When an investor views the investing world through the lens of abundance, then harbouring a sense of FOMO makes absolutely no sense.
Instead of believing that favourable investment opportunities are running out, they believe that opportunities are abundant, and that another opportunity is closer than they realize; they simply have to stay vigilant.
From 2009 up until March 2020, the U.S. experienced its longest bull market in history. A bull market usually means most investments are selling at premium prices, but that does not mean every investment is expensive, meaning there are still excellent opportunities to seize.
An investor with an abundance mindset would have understood that and would have made sensible investments during this time. The FOMO investor would have been overly bearish, believing that they missed their golden opportunity long ago.
Turn the clock back to the 1990s. Nobody would have suspected that Exxon Mobil would one day be removed from the Dow Jones Industrial Index in favour of the software company Salesforce.
There will always be new major players in business; that is a reality every business has faced and will continue to face.
An investor with an abudance mindset and understands this reality is effectively immune to FOMO. What would they be missing out on when it’s only a matter of time when new, dominant companies appear?
Not every investor invested in Microsoft in the 80s and 90s. Not every investor bought Amazon when its shares were selling for under $100. A lot of investors missed out on these opportunities, yet many of them were still able to make money – they understood that missing out didn’t mean disaster.
Maintaining a sense of FOMO makes little sense when there is nothing to lose out on. Investors with an abundance mindset know that just because they miss an opportunity does not mean it is the end of the world.
FOMO and Analysis Paralysis: Two Extremes
It is important to understand that FOMO represents one extreme when it comes to making decisions. Acting too rashly is just as bad as not acting fast enough, or at all.
Imagine an investor who, instead of having FOMO, suffers from Analysis Paralysis. That is, they spend more time thinking than they do taking action.
Instead of desperately trying to keep up with everyone else, they refuse to seize an opportunity because they want to spend more time “thinking about it”. They spend their whole lives thinking and analyzing, while not having taken a single step forward.
Taking the time to think about the merits of an opportunity is important, yes, but opportunities do not last forever. An opportunity will not wait for you until you are ready.
When taking action, an investor needs to strike a balance between having all the necessary facts to make an informed decision, while also making sure they act fast enough.
Of course, this does not mean there is a middle ground every investor needs to operate in. Operating between the extremes of FOMO and Analysis Paralysis means there is a wide spectrum investors can operate in.
Some investors may like to take their time, whereas others may choose to act faster than others. As long as they do not operate at the extremes, then it is fine.
Personally, I like to take a bit more time to think things through. I’m the type of investor who does not want to deal with my mistakes later – I want to get it right the first time.
However, I understand that I cannot spend all my time thinking and that I need a specific date to take action. I move at a pace that I feel is right for me.
Some investors like to take their time, others like to move a bit faster. Every investor is different, so it is only natural that not all of them will move at the same pace.
As long as you do not operate at one of the extremes, you are free to choose your own rhythm.
Wrapping Up
Dealing with emotions is a struggle every investor faces. The Fear of Missing Out (FOMO) is a very dangerous manifestation of our emotions overriding our ability to think rationally.
FOMO is so dangerous because it leads to investors making very rash and uninformed decisions.
Choosing to purchase or sell an investment in fear of being left behind is a classic example of speculation, something every investor must actively avoid.
Instead of having a scarcity mindset, adopting an abundance mindset makes FOMO irrelevant, because there will always be future opportunities that await.
FOMO and Paralysis Analysis are two extremes on the decision-making spectrum. An Investor must strike a balance between making informed decisions without dragging their feet.
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