Should You Participate In Market Frenzy? What About FOMO?

Hey, The Investor’s Podcast Network Community!

I was recently asked, “how do you deal with FOMO?”

This made me realize just how many times I’ve been asked this question and that the way I approach it might help some of you, as it has for me over the years.

First, for those who may not know, “FOMO” stands for “Fear Of Missing Out”. In the context of financial markets, it means that you become worried that you’re missing a big, or great, investing opportunity when a security is skyrocketing in price, because you feel “everyone else is making a ton of money” and you’re not.

Think bitcoin or GameStop, most recently, but there are plenty of examples throughout history.

This is one of the most difficult parts about investing.

For decades, no consideration was given to human psychology in relation to investing. Academic theory assumed that markets were rational and that humans made rational decisions when investing.

As new research has shown, human behavior has a massive impact on financial markets. This research created an entirely new field called Behavioral Finance. It has come to light that human emotions often force your brain to think irrationally when approaching investing.

Among other dynamics, this is one of the reasons why investing is more often an art than a science.

Now, the question is how do we stop our brains from working against us and actually take conscious control of our investing behavior?

The strategy I’m about to explain is what works for me. It may not work for you, and it certainly won’t work in everyone’s situation. For example, if you’re rather close to retirement, you may not want to employ a strategy like this.

During the early years of my investing career, I would see events unfolding that cause FOMO for many people. Being a strict value investor, I had the self-control to think rationally for a bit, but then I would fold — I’d cave to the pressure and ultimately end up buying in. However, since I tried to fight the urge to invest, I’d often buy in too late and near the top. Countless times I bought towards, or at, the top and was left “holding the bag”.

After learning my lesson a few times, I decided to stop participating altogether, but that led to a new issue.

A bit of resentment started to build up. The FOMO also continued to build up and every time a new FOMO event came around, it became worse and worse.

I spent a lot of time thinking about this dynamic and how I could beat it. I spoke with a lot brilliant people on the podcast about it. 

I knew it wouldn’t be easy, but I knew there had to be a way.

Nothing came to mind for a while, then it hit me.

I’m going to use a bit of a cheesy analogy from here forward, but it’s how I truly think about it myself.

How do you stop your arm or nose from itching? You scratch it. If you don’t, the itch gets worse, and worse, and worse, until it’s unbearable and you can’t help but scratch it. You also typically have to scratch much more the longer you wait. If you had scratched it right away, you wouldn’t have had to scratch for as long or as hard.

My strategy is the same with FOMO events. How do you fight the urge of participating in FOMO events? You participate.

You’re probably thinking, “what?”

Please allow me to explain. 

If you don’t participate, the FOMO is going to continue to build up, you’ll eventually cave in and participate, just like you do with scratching an itch. When you do, you’ll likely go in with a large position to make up for all the previous FOMO events you “missed out on”. 

I know from firsthand experience, because it’s happened to me. 

Instead, what I started to do, was participating in nearly all of them.

That’s right. I bought bitcoin. I bought GameStop. I participated in numerous other FOMO events as well.

The important piece isn’t that I participated, but more so about how.

I enter with very small positions — just enough to “scratch the itch”. The way I thought about it was to keep the position small enough so that if I lost it all, which is very likely, it wouldn’t really hurt my portfolio, but also large enough that I’d be happy to have at least participated. When I’m considering these FOMO events and position sizing, I always ask myself, “would I be more frustrated that I lost this money or that I didn’t participate in the upside at all?” Meaning, would it impact me more if I lost the money or if it went on to be super successful and I had no skin in the game?

I was also taught, “if this turns out to be failure, a small position is all I want, but if it’s the next great growth opportunity, a small position is all I need.”

This thought process has helped me significantly. I no longer suffer from FOMO — or very rarely. The itch no longer grows with each opportunity that passes by.

I even use this approach when it comes to stocks that aren’t necessarily “FOMO events”. The TIP Finance tool with its Momentum feature helps me significantly with this. 

If there’s a stock I’m interested in buying, but I may not be overly thrilled with the valuation, or a different characteristic, I often look at the Momentum feature in TIP Finance to help me decide if there’s a momentum play available.

Again, I often enter with just a small position, just enough to “scratch the itch”. I ask myself the same questions as above — I go through the same thought process.

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