Warren Buffett once famously said that smart investors should be “fearful when others are greedy, and greedy when others are fearful.” In other words, sensible investors should avoid putting money into trendy holdings merely because of their buzz. By the time the “next big thing” gets popularized, the profit margin is likely to be a small fraction of what it was for early investors.
Still, the fear of missing out — or FOMO — on a hot new investment opportunity is hard to ignore. It’s easy to wish that you could go back in time and buy a few shares of Google in 2004, or invest a few bucks in Bitcoin when it debuted in 2008. Smart investing means looking forward instead of the past. Sometimes it means ignoring the present, too — especially when FOMO might lead you to buy high and sell low.
Where Does FOMO Come From?
The concept of FOMO is partially associated with the social anxiety that results, in part, from watching the “highlights reel” of other people’s lives play out on social media. We all have those friends on Twitter or Instagram who seem to pack in an exotic vacation every other day. It’s hard not to feel like you’ve missed out on some similar experience.
But from an economic perspective, FOMO is a psychological phenomenon associated with loss aversion, particularly in terms of financial decision making. According to Huffington Post:
“In behavioural economics, and decision theory, the psychology behind FOMO can be partially explained by loss aversion. Amos Tversky and Daniel Kahneman demonstrated people’s strong tendency to want to avoid any losses. In fact, the research suggests that losses are twice as impactful on people, psychologically, as gains. This leads to risk aversion; we just hate to lose out on anything.”
Hating to lose out on anything can inadvertently lead to trying to get a stake in everything, increasing the risk of investing in hyped-up stocks and trends for fear of missing out on a potentially big payoff rather than for legitimate value.
We need to avoid this at all costs. Here are a few actionable steps to avoid acting purely due to the fear of missing out.
Focus on the Long-Term, Be Patient
Patience is rarely used and its importance is highly underrated when investing. Investing should be more like watching paint dry or watching grass grow. If you want excitement, take your $800 and go to Las Vegas.
Many of the worlds greatest investors, including Warren Buffet, George Soros, Carl Icahn, and Peter Lynch all have 1 thing in common. They outperformed the crowd by always focusing on the long term, and understanding the importance of patience.
Most of Warren Buffet’s wealth wasn’t made until decades into his career. Buffett wasn’t even a household name at age 50. He needed more time to let his wealth grow. It grew slowly at first, then skyrocketed into the billions.
Stop staring at the charts all day.
One of the first things I recommend to new investors is to avoid staring at the charts all day long. By staring at the charts, you are increasing your chances of obsessing, overthinking, and overanalyzing. This can put you into a dangerous worry cycle, and cause extreme frustration, and anxiety.
If your investments are making you lose sleep, or are distracting you from your day to day life, you are likely over-invested. Always make sure to step away once in a while, and focus on your physical, and mental health.
Recognize when it’s too late.
The moment your siblings, friends, teachers, parents, and grandparents are talking about an investment, and the prices have surged hundreds or thousands of percent in a short time-frame, it’s probably too late.
By studying history, we know that retail investors are always the last to jump on the band wagon. Once everyone is talking about it, and blindly jumping in, it’s crucial to understand the risks involved.
One of the most recent examples of this is with $DOGE coin. Few jumped in when it was cheap, but as prices soared, it gained media attention, and millions of traders wanted in.
Despite Doge being inherently worthless, traders were too focused on not missing out, and getting rich, rather than managing their risk. When prices went too high, it hit a massive ceiling, and tumbled.
Many of those who bought in up high, and failed to take profits are now left holding worthless meme coins. The WallStreetBets narrative for buying Doge was just a bullshit justification for new traders to FOMO in, but in reality, the coin had no relation to the Wall Street short squeeze.
Understand there will be more opportunities.
When people have a rushed, and impatient mindset, they tend to make short-sighted, and irrational decisions. It’s important to understand that in the markets, there will always be new opportunities for you.
Just because you missed out on one trade, doesn’t mean that it’s the end of the world. The markets aren’t going anywhere, and those who are patient, persistent, and calm, will find themselves taking advantage of new opportunities, rather than beating themselves up over missing out on past events.
Verbalize Your Reasons for Entering a Trade
Most of the rationalization that underpins every FOMO trade takes place internally, as we make excuses for why we are ignoring analysis and logic to simply follow the herd.
Verbalizing your reasoning forces you to truly evaluate what you know or think you know about this trade, which will quickly make it clear whether you have solid reasoning behind a trade or whether you are just making excuses.
Investing vs Speculating
If you have a strong FOMO when it comes to seeing stocks like Tesla breaking out above all resistance, then you may be a speculator.
Speculating is generally defined as “form a theory or conjecture about a subject without firm evidence.” or from a stock standpoint, “invest in stocks, property, or other ventures in the hope of gain but with the risk of loss.”
The words, “without firm evidence” and “hope” are the keywords in the definition of speculating. I put it in the same ballpark as gambling.
According to Benjamin Graham the father of value investing and author of The Intelligent Investor, “An investment operation is one which, on thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”
Your social media following
In an age of social media and 24 hour news cycles, where there’s a missed opportunity or the promise of ‘the next big thing’ right under our noses, it’s impossible to avoid FOMO without becoming a hermit.
Who you follow on social media has a major influence on your trading behavior, whether you know it or not. If you’re following moon boys screaming about an asset surging thousands of percent by next week, maybe it’s time to unfollow. It’s best to follow mentally sound, patient, and calm traders (like CryptoWhale) who don’t intentionally try to get their followers to FOMO into shitcoins, and penny stocks, so they can sell their bags.
Realize That “What Ifs” Will Take You Nowhere
Many people who are afraid to miss the next big thing, cannot forgive themselves for not buying Bitcoin or Ether at a low price. They keep thinking of how rich they would be if they had identified this opportunity. As a result, they try to correct this mistake again and again.
To break this destructive pattern, remind yourself that thinking about what could have happened is a total waste of time. By the way, among the world’s top Bitcoin millionaires and billionaires, there were few random people. Mostly, these early investors had a background in finance, fintech, or programming. In its younger days, cryptocurrency was widely seen as a financial tool for geeks, too complicated for an average user.
Therefore, for many guys who now regret they didn’t buy bitcoins in 2011, the barrier to entry was actually too high. Even if they had bought or mined some bitcoins back then, they would have probably spent them on a pizza. Or would have sold them when the price reached $100.
In that light, it would be wiser to stop asking “what if” and start educating themselves. The more you know about crypto investing and trading, the easier it will be to spot the coins that have real value.
Read About FOMO-Based Scams
One of the famous types of scams playing on FOMO is the pump-and-dump scheme. Long story short, the group behind the scheme makes the price of some shitcoin rise sharply. It attracts many FOMO traders who believe they have spotted the “next big thing”. When the price reaches a certain mark, the scammers sell their coins and make multiple gains, at the expense of other players.
Unfortunately, scammers use many tricks to cheat people out of their money. In most cases, they exploit their fear-of-missing-out to reach this goal. Being aware of this fact helps avoid many honey-traps.
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