The Allure of the FOMO-vestor
Individuals who cannot master their emotions are ill-suited to profit from the investment process.
Benjamin Graham
Benjamin Graham is widely known as the father of “value investing” and the teacher of the Oracle of Omaha – Warren Buffet – one of the greatest investor in our time.
Most (if not all) investors can definitely resonate with this quote.
Introducing the FOMO-vestor
FOMO = Fear of Missing Out.
This is an investor’s worst enemy / weakness akin to how Kryptonite is to Superman.
I am going to coin investors who invest out of FOMO -> FOMO-vestor.
Characteristics of the FOMO-vestor:
- Chasing a hot investment (without rationale) even when it has risen 500%
- Copy someone’s investment because they made good returns previously
- Always asking, “Boss, ada tips ka?” (Do you have any investing tips?)
Are you a FOMO-vestor? I was… once upon a time.
The Temptation is Real
The hype of momentum stocks is real. I’m sure we have seen and experienced constantly people making buckloads through investments.
Family and friends who managed to get in on the opportunity of these rising investments starts to announce to the world about the winning investments that they made.
Let’s not forget about the advertisements / marketing posed by various “investment gurus” on how they made handsome profits through their investments. Or people we aren’t close to shouting out astronomical profits in social media.
FOMO-vestor question: Can still invest?
How can we resist when we see all these success cases? Every one wants a piece of the action to propel and make more returns in life.
This brings me to the next BIG point.
Survivorship Bias
In the studies of behavioral finance – the psychology of people that influences their actions in the market – there is one term called survivorship bias, which is so relevant here.
Survivorship bias happens when people look at only successful cases and ignore failed ones.
This happens very evidently in entrepreneurship. For example:
- We focus on the success of Grab an ex-Malaysian ride hailing startup who went on to become a super app company and lately fundraised over USD846 million in Feb 2020 and their last valuation was USD14 billion.
- What about these other 43 ride hailing companies (updated as of 8 Nov 2019)? How many of them have you heard of before?
- Are there any others that started and failed and didn’t appear in this list?
Similarly in investing, it is easy to be pulled into survivorship bias. There are so many people touting on their success cases!
Take a look at the surge of glove stocks this year. Many people proudly claimed that they made a lot of profits overnight by investing in glove stocks.
- Have we forgotten those who sold their stocks before it soared and missed the profits?
- How about those who bought at a high price and then they panic sold the shares when it took a nose dive?
Take this case and extrapolate it to the gold rush or the bitcoin spike this year. FOMO-vestors run the risk of losing out because they don’t have a plan and they don’t understand the risk.
Remember… only those who succeeded will be heard. Those who failed will be too ashamed to even mention.
What Can We Do?
I’ve been a FOMO-vestor during my early years of investing.
It is easy to enter an investment. Do you know when to get out? Paper profits can turn into actual losses very quickly.
One of the factors that I resign to is luck and how it actually plays a big part in investing because we can’t control what’s going to happen to Mr Market.
- I’ve been lucky a lot of times (e.g. entering AirAsia share in 2015 for less than 90 cents, and exit close to RM3 in less than a year)
- Equally, I’ve been royally screwed by Mr Market (e.g. entering a few oil and gas counters just to see it crash in 2014. And it hasn’t recovered up to today, but I have already cut my losses on these investments)
Learning from falling, I control my FOMO-vestor side through these methods:
- Spiritual and Mental: Accept that we can’t make all the money in the world and everyone has their own race to run, even in investing.
- Know My Style: Be clear on the style of investing that suits me, which is heavily rooted in fundamentals than technicals / momentum.
- Stay Invested: In fundamentally strong and defensive investments for the majority of my portfolio (investing principles here), hence won’t have available cash sitting around to abuse.
- Flexibility: Allocate a small fund (max 10% of my total portfolio for me) to flex my FOMO-vestor muscles. I still have this fund now, but I often use it to invest into cheap fundamental investments rather than FOMO-vestor investments.
- Have a Plan: And stick to it religiously, even for FOMO-vestor investing. When to exit? When to cut loss? What is the plan for the trade? Without which, it is better to not enter the trade.
It takes disipline and willpower, but so far it has helped to contain my FOMO-vestor side.
Drawing a Parallel – Demon Slayer: Kimetsu no Yaiba
I recently came across this Japanese Anime / Manga that I found very interesting and enjoyed. Highly recommend, if it is your kind of thing!
The premise of the story:
In Taisho-era Japan, Tanjiro Kamado is a kindhearted boy who makes a living selling charcoal. However, his peaceful life is shattered when a Demon slaughters his entire family. His little sister Nezuko is the only survivor, but she has been transformed into a Demon herself! Tanjiro sets out on a dangerous journey to find a way to return his sister to normal and destroy the Demon who ruined his life.
https://kimetsu-no-yaiba.fandom.com/wiki/Kimetsu_no_Yaiba_Wiki
How is this relevant? Our focus is on Nezuko who was turned into a Demon.
A Demon (in this story) needs to devour humans to survive and grow stronger. Nezuko is also tempted by this when she was turned into a Demon. Various times she was tempted by humans corpses and blood.
However, she used her willpower to resist and also to focus on what really matters – the human part of her and the relationship with her family. Instead of consuming humans, she used an alternate (but slower) method to recover and regain strength – sleep for long periods.
FOMO-vestors are very often tempted by high returns achieved by others, but do not have the risk or appetite to take on these investments.
I guess what I’m trying to say is… Be like Nezuko, remember that you are an investor, not FOMO-vestor!
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