Is FOMO affecting your stock market returns?
September 21, 2022
In today’s world, it is relatively easy to feel that we are missing out on things due to our easy access to all kinds of information via digital media. There could be a general feeling that maybe others are living a better life, doing things in a better way, having better experiences & basically living life the right way, to the fullest. This phenomenon is known as ‘FOMO’ ie Fear Of Missing Out.
FOMO often creates a flux of complex emotions such as envy, impatience & fear. This is not just limited to other parts of your life but also to your investments & the way you handle your portfolio. This ‘fear’ can make you question your own returns and lead you to believe that you too can be investing in a manner that a particular friend claims to be investing, or that you too can imitate the so-called ROIs of the various investing experts.
Such complicated emotions tend to override logic & can often create obstacles in your investment journey by leading you to make investment decisions that you may have not in normal circumstances. For instance, making riskier investments that are way above your risk appetite in the desire to earn higher returns. Watching others make a lot of money on a certain stock can make you feel obligated to join in and get in on the gains, even if the logical part of your brain is telling you that the biggest rewards have already been had. Also, hearing from business news personalities and acquaintances that they have already had financial success with a certain style of investment or stock can give you an unfounded sense of confidence about your ‘investment choice’. This could result in you ignoring advice from experts that you may have normally taken.
The desire to get on the bandwagon can be strong. But it’s important that your investment decisions are driven by logic, research and patience and not by FOMO. So, how do you tackle it?
Understand Trends and Influencers
In order to be able to deal with FOMO, you need to understand why you are feeling it in the first place. We do not claim that the digital world can never lead you to make the right investment decisions. Not at all. In fact, research has never been easier with information at our fingertips. But it is necessary that you are able to differentiate between a quality investment opportunity & the new ‘It’ thing or a trend being currently run.
For instance, 2021 was a year when FOMO was at an all-time high. Everybody was enamoured with the bull rally while the nation was still in lockdown owing to the 2nd & 3rd waves of the Covid-19 virus. Even a common retail investor knew the two industries that were rallying: IT & Pharma. The reason was that the IT sector had a relatively smooth transition to work from home & was also actively generating revenue by helping other sectors & industries with their digital transition. Pharma on the other hand benefitted from the sudden demand for medicines & healthcare.
In a moment of FOMO, investors adopted the ‘Buy At Any Price’ approach. However, not all stocks belonging to the leading sectors were worth the price that they were being traded for. Let’s have a look at a couple of stocks that rallied high up in the lockdown frenzy. Below is the chart of Indiamart Intermesh Ltd.
Chart of Indiamart Intermesh Limited. (Jan 2020 - current)
Indiamart is India’s largest online B2B marketplace for business products and services with approximately 60% market share of the online B2B classifieds space in India. It earns revenue primarily by selling its subscription packages. However, it could not maintain its 10,000 odd level post the lockdown & investors who got caught up in the stock due to FOMO were left with ridiculously high levels.
Another example is a stock that belongs to the pharma sector: Glenmark Pharmaceuticals Limited. This pharma stock started rallying up post covid after being in a downward spiral for quite some time. As you can see in the chart below, its upward rally wasn’t quite sustainable.
Chart of Glenmark Pharmaceuticals Limited. (June 2019 - Present)
Another example, Tata steel limited, comes from the Metal sector. Being a cyclical industry, Metals can be quite challenging for investors to profit from. But after witnessing the rally & all the noise on various digital platforms, investors often enter such stocks when it is too late and at rather high levels. This is nothing but FOMO that prevents investors from making rational investing decisions.
As you can see in the chart given below, Tata steel rallied from Oct 2020 to around July 2021. Post which, the cyclical sector stopped its upward trend & eventually headed down. This rally was mainly fueled by rising metal prices globally.
Chart of Tata Steel Limited. (Oct 2020 - Present)
It is important to note that letting the losses run is the most serious mistake that almost all investors make. If an investor hesitates and allows his loss to increase by 20%, He will need a 25% gain just to break even. If he waits longer until the stock is down by 25%, then he will have to make 33% to get even. If the loss is 33%, he will have to make 50% just to get back to the starting gate & reach break even. The longer you wait, the more the math works against you, so don’t vacillate. Moving immediately to cut out possible bad decisions is the better idea.
We also suggest that while various Investment websites, industry experts, TV shows, colleagues and Youtube Gurus may all tout the latest tip for the next big thing, don’t succumb to FOMO and jump into an investment without understanding how it works or the risks. Do your own research and take the time you need to determine whether the investment is worth it or not and if it fits with your financial goals.
Think Long Term
According to the stock platform Etoro, a whopping 80% of day traders lose money over the course of a year with a median loss of -36.30%! It’s no surprise that more than 75% of all-day traders end up quitting within just two years.
All the so-called stock tips that are based on various ‘Algorithms’ which promise to generate multifold returns are best avoided. If there really was a magic system to day trading that could earn +1000% profits in a year, there is no way that it would be on sale for Rs. 200 and Warren Buffet, the legendary long-term value investor would not be the most successful investor in the world.
Day trading is no different from casinos. You can put a few bucks into it and you may get lucky a few times in a row. But in the end, the house always wins. This type of investing style is inherently risky. Not only are you competing with your own emotions when day-trading, but also with Hedge funds, institutional investors, high-frequency trading, algorithms, and just random news.
You can better adapt your investment style to something that will benefit you in the long term with a better risk-to-reward ratio. Long-term investing is less risky, less stressful and has better tax benefits. Also, you are way more likely to make money over the next few years than you are over the next few hours or days. As the infamous saying goes, it's all about ‘time in the market’ & not about ‘timing the market’.
Pick your Investment strategy and stick to it
Buying and selling investments along with trends is not the best way to plan for a strong financial future. Market swings are inevitable. And as we have seen, many trendy investments can experience a lot of volatility. We’ve seen high highs and low lows. These kinds of investments may be appealing at first, but once the novelty wears off some investors may decide to move on to something else or collectively book profits. This may cause the stock to take a significant downturn. How would you feel if your investment lost 20, 30, or even 50%?
If catching the momentum & upswing in trending sectors is still what you desire, then we suggest that you pick an investment strategy that is designed to capture the various short-term opportunities available in the stock market. The right strategy should be able to actively cut your losses short in order to ensure a healthy stock portfolio. One such investment strategy is MILARS. It is an active strategy based on six guiding principles & is complete with selling rules.
While FOMO may always be a part of our lives, it doesn’t have to control your life. Use your strongest willpower to steer clear of it. Remind yourself what’s best for you & that not everything you see or hear is true. What reaches your eyes are only the things that people want you to see, not the things that you need to see. Say NO to FOMO. Stick with your long-term plan and don’t make investment decisions based on a fear of missing out.