Money Mongoose

Investment psychology: FOMO

Warren Buffett once said that as an investor, you should be “Fearful when others are greedy and greedy when others are fearful.” This nugget of advice can capture multiple ideas when it comes to investing:

  • Taking a contrarian view
  • Not following the crowd
  • Maintaining control of your emotions

Here, I’ll consider the third aspect.

I talked about experiencing emotions while investing in the post: Temperament, patience, poker and investing. While I typically avoid investing under emotional influence, when I have no choice, I try to take the following mitigating actions:

  • Recognise the emotional influence – being aware is half the battle. Knowing I am under emotional influence allows me to ask my question, is what I am doing logical? Would I make this trade in neutral conditions?
  • Fall back to objective criteria: I go back to my fundamental analysis, what is my valuation of the stock and risk/uncertainty attached to it? Does the price still provide an adequate margin of safety? Technical indicators could also be used

For the stock in question, I was driven by the ‘fear of missing out’ or FOMO. I had prepared for a race I was likely to win, but the starting gun had fired while I was walking to the starting line. I was concerned that the share price would run away from me. I had to balance two points:

  1. Risk of the opportunity slipping away as the price rises higher and higher; versus
  2. Staying calm, waiting for a better price to buy in, not being motivated by FOMO

In the end, option 1 won: the price still gave me enough headroom for profit, but unfortunately did not have the margin of safety I would have liked, but I didn’t expect to get a better price. RSI was also not terrible.

I hate to buy on FOMO as it leads to doing stupid things like joining the dotcom boom bandwagon or buying bitcoin at 19k. In this case, it was not motivated by crowds, but fear of not being able to execute on my 2018 investment plan. Time will tell whether it was a good decision or not!


One response to “Investment psychology: FOMO”

  1. Phil says:

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