Taming the FOMO: How to Conquer the Investor's Worst Enemy
Today's topic is Taming the FOMO Beast: How to Conquer the Investor's Worst Enemy. It is a psychological bias that every investor, including you, Master, will experience at some point. It seems you are very interested in this topic, so I ask for everyone's focus.
FOMO? That's totally Kurumi-chan's area of expertise! Fear Of Missing Out! That feeling of panic when it seems like your neighbor Tom and Jane next door are all making a killing and you're the only one missing the boat! Just thinking about it makes my heart race! Devilish!
It's like this, for example. Suddenly, some coin starts soaring 100%, 200%, and the online communities go wild! When you hear things like, "You'll be dirt poor if you don't get in now!" or "This is the last chance to change your life!", all reason goes out the window and the only thought is that you have to buy in immediately! That thrill is the very essence of FOMO!
Kurumi, you shouldn't leave out the part where that thrill leads to the miserable destruction of one's assets.
FOMO is essentially a phenomenon where the emotions of 'greed' and 'impatience' paralyze reason. Humans are social animals, so they are heavily influenced by the actions of those around them. When they see others making money, they are more likely to be swept up by the herd mentality of 'I need to get in on that trend' rather than analyzing the asset's intrinsic value or fair price.
Recall the meme stock frenzy of 2021. Many retail investors bought stocks with no regard for a company's fundamentals, driven solely by community hype and a vague hope that 'it will go up more.' And what was the result? Countless investors were left holding the bag at the peak, suffering massive losses.
An investment based on FOMO is no different from a game of passing the bomb. You are very likely to be the one holding the bomb when it finally explodes.
Mikael is correct. In behavioral economics, this phenomenon is explained by the 'Principle of Social Proof' and the 'Bandwagon Effect.' It's the tendency to blindly follow the choices of the majority in uncertain situations.
There is statistical data showing that during the Bitcoin bull run from late 2020 to early 2021, the Google search volume for the keyword 'Bitcoin' and the number of new cryptocurrency exchange accounts opened exploded as the price neared its peak. This suggests that most investors chased the price upward late in the game without sufficient analysis. And many of them had to endure the subsequent crash with their entire bodies.
Myu-tan's data is factual, but that doesn't mean it's all bad! FOMO can also be a sense for capturing the market's tremendous energy! It's important to be brave when everyone is scared, but it's also a skill to ride the wave when everyone is excited and make a quick, hefty profit! Of course, knowing when to get out is the most important part!
In Kurumi-chan's opinion, it's more productive to find a way to use FOMO to your advantage rather than avoiding it altogether. For example, set aside just 1-5% of your total seed money as a dedicated FOMO fund and use only that to enjoy chasing the trends! That way, you can taste the market's hot potato without taking on huge risks, right?
A dangerous idea, Kurumi. Have you not considered that the thrill from a successful 'dedicated FOMO fund' could lead one to sacrifice even larger sums of money as an offering to FOMO? That's like starting by playing with matches and ending up burning down the entire house.
The first step to overcoming FOMO is to humbly accept the fact that 'I cannot seize every opportunity in the market.' And you must accept the mindset that there is no 'easy and fast jackpot' in the world. Investing is a marathon, not a 100-meter dash.
The very first thing you should do when you feel FOMO is to 'take your hand off the buy button.' Then you must ask yourself a few questions.
- How much do I really know about this asset?
- Is there any reason I want to buy this right now, other than the fact that its price is going up?
- If the price were to fall by 50% from here, would I buy more, or would I sell in a panic?
If you cannot answer these questions clearly, it is undeniable proof that you are being swept away by FOMO.
Mikael's questions are a good checklist. Making it a system is even more effective. The surest way to overcome FOMO is to establish your own investment principles and system in advance. This fundamentally reduces the room for emotions to intervene.
- Create an Investment Plan: Clearly document which asset you will buy, under what conditions, how much, and why. When the market gets hot, rereading that plan will help you regain your composure.
- Mechanical Dollar-Cost Averaging/Selling: Utilizing 'limit orders' to automatically buy or sell when a certain price is reached, or implementing 'dollar-cost averaging (DCA)' to invest a fixed amount at regular intervals, can minimize emotional decision-making.
- Keep Your Distance from the Internet: An 'information diet,' where you temporarily stay away from investment communities and news, is also a good method. Especially when the market is overheated, intentionally distancing yourself from the madness of the crowd is the way to protect your assets.
Ultimately, FOMO is like a psychological virus that exploits the void where your plan is absent. The only potent vaccine is a well-structured set of investment principles.
〔 Final Briefing 〕
Master, I will summarize the discussion among the three of us.
The Allure of FOMO (Kurumi's Perspective)
- Explosive Profit Opportunities: It gives you the thrilling expectation of making huge returns in a short period by joining the trend where everyone else is making money!
- Capturing Market Energy: Sometimes, FOMO can be a signal that tells you where the market's most powerful trends and energy are headed! If you use this well, it can become an opportunity!
The Trap of FOMO (Mikael's Perspective)
- Induces 'Blind Investing': It makes you make irrational buying decisions based solely on price appreciation and herd mentality, without analyzing the asset's intrinsic value or fundamentals.
- The Main Culprit for 'Buying the Top': When FOMO reaches its peak, the price is usually at its highest point. Latecomers often have to bear the full brunt of the subsequent price decline.
- Destroys Investment Principles: It shatters your own long-term investment principles and causes you to be swayed by impulsive, emotional trading.
A Guide to Overcoming FOMO (Mew's Perspective)
- Establish Investment Principles: The most important thing is to establish and document a clear investment philosophy and plan beforehand to avoid being swayed by emotions. You must define 'why, what, when, and how' you will buy and sell.
- A Systematic Approach: You must minimize the room for emotional intervention by using automated trading strategies like Dollar-Cost Averaging (DCA) or limit orders.
- Intentional Distancing: During periods of market overheating, an 'information diet' is necessary to maintain composure by staying away from social media and investment communities. There is no need to feel impatient about others' gains.
Conclusion: FOMO is a powerful psychological trap that stems from the fear of 'missing out on an opportunity alone.' While it may feel like a thrilling opportunity, as Kurumi says, it is far more likely to be a shortcut to destroying your assets, as Mikael warns. FOMO is a natural emotion, but acting on that emotion is something to be avoided as an investor. You need the wisdom to cross the swamp of emotions with your own clear principles and system.