Is Everyone Making Money Except You? : The Prudent Investor

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Have you ever skipped dinner with your friends without a second thought, only to find out it turned into drinks, and bar hopping, and a house party, and supposedly, “the best night ever”? And the day after, you’re looking at pictures and hearing stories and mentally kicking yourself.

No one can attend every event. Sometimes, there’s something you really want to go to, but responsibilities get in the way. Maybe you have to work late, or you’re obliged to go to a relative’s family function the same day your friend decides to throw the house party of the year.

Either way, fear of missing out – known as “FOMO” – affects all of us sometimes. It’s described as feeling anxious that something thrilling or fascinating is occurring elsewhere. Social media can really amplify this anxiety when one sees posts and images about the fantastic time their friends are having without them. This feeling can be quite overwhelming.

What Has FOMO Got To Do With Investing?

There are two kinds of fear with investing:

  1. The Fear of Missing Out (FOMO)
  2. The Fear of Being In

In March 2020, there was the gnawing fear of being in risky assets as they were getting thrashed. That fear of being in soon transformed into the fear of missing out as the markets have boomed back.

Being disciplined is toughest at market peaks and troughs. Towards the trough, fear is overpowering. Concerns that the market will drop further, along with seeing your portfolio plunge in value, make holding or purchasing more units very challenging.

However, investing near market peaks is another challenge, as greed takes over. You kick yourself for not investing before the markets boomed.

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You want to acquire these hot investments to benefit from further returns but are concerned that you have missed the run-up.

Seeing others profit from a great rally might make you feel compelled to participate in the gains, even though your brain is telling you that the major returns have already passed you.

Our Current Situation

A story goes that Joseph Patrick “Joe” Kennedy sold out of the stock market right before the 1929 crash after hearing stock tips from his shoeshine boy. Tips from a primitive investor signaled to him that the market was inflamed and ready to bust.

Regardless of whether this story is true, it makes a valuable point; when it appears everyone is talking about how much they are making in the market and exchanging stock tips like recipes, the market is likely puffed up.

There is a price you pay to profit from something. Valuation metrics can help determine how much that gain from the market can be. Below is a table on price earnings (PE) and price to book value (P/BV) ratios at various index levels (highs and lows) for the Nifty 50 index.

Demat Account Openings

An optimistic capital market also leads to a high number of demat account openings. There was a sharp increase in demat account openings in 2017-18, which stagnated as markets corrected.

But in 2020-21, there was a three-fold rise in demat account openings notwithstanding the Covid situation against the average for the previous three years. This is an indication of upbeat market sentiment.

Are You Saying The Market Is Going To Crash?

Do factors like the run-up in the market, high PE ratios, and stories of retail investors plowing into the market indicate that a crash is impending? No. While bear markets are unavoidable, it is not possible to predict the peak reliably.

The next bear market might start tomorrow or years from now. Anyone who says they know when we are at the peak is only speculating. One investing cliche is that the market often continues its course longer than expected on both the upside and the downside.

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What To Do?

Most people have at least once been preoccupied with the idea that someone, somewhere, is richer, or is living a more exhilarating life. It’s not easy to hear of others making hundreds of percent returns rather quickly with investments you missed.

FOMO can be overpowering.

But there is something you can do about it. Instead of joining the herd, rebalance your portfolio by profit booking from your high achievers and investing in value stocks, international stocks, and non-correlated assets that have been laggards.

Don’t follow the crowd or the investment trend of the day. Look at the big picture and stand by your investment objectives. Successful investors ignore the noise and remain focused on their long-term goals. This isn’t as exciting as day-trading or cryptocurrencies, but history shows you’ll be better off.

Both in investing and life, capitalizing on every opportunity is just not possible. Many times, we think about all the hypothetical returns we missed out on, which boils our blood. It may lead us to chase the “next big thing” in investing with potentially disastrous results.

The Cure To FOMO

FOMO is a primal predisposition. It’s in-built from birth. Though impossible to experience absolutely no FOMO, there are solutions to keep it in check and prevent it from impacting your investing choices.

Setup A Play Account

Set aside about 5% of your total portfolio for “play”. You may buy any speculative stocks, cryptocurrencies, etc you want to pursue for the exhilaration of it. Separate it from your primary portfolio which you treat with sanctity.

Relish Feeling Out Of The Loop

There are great things happening out there and sometimes you’re not a party to it. Accept that sometimes there’s nothing you can do about it. We always need to make choices. Come to terms with the fact that you can’t say Yes to everything.

JOMO is the acronym for the Joy of Missing Out coined by Anil Dash, CEO of Glitch. It means enjoying what you’re doing in each moment without worrying about what everyone else is doing.

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Easy Money

It’s easy to see how celebrities and influencers touting crypto schemes and giveaways make it. Which makes it tempting to imagine that one great score on Bitcoin or stocks could wipe out a student loan, help start a business, or make a down payment on a house.

Temperament is everything. But nobody wants to work on it, because it’s hard work and it’s difficult to measure progress. In the short term, it’s unrewarding and unsatisfying, because self-discipline usually involves watching other people party and saying, I’m not going to take part.

Take A Long-term View

For the majority of investors, achieving their goals will take a matter of years. Wealth creation happens steadily over time, rarely overnight. Resist the urge to panic at bad news or pursue the latest craze. Focus patiently on your long-term strategy and avoid making decisions based on FOMO.

Final Word

FOMO is a tumultous emotion. This applies in investing and in life. It is a feeling that can lead to all kinds of mistakes, be it investing, your career, relationships, or budgeting.

The good news is there is something you can do about it if you recognize it. Avoid FOMO when investing by adhering to a fundamental strategy, conducting meticulous research, and walking away from an option when the need arises.

This can significantly increase your returns.

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