Noah Didn’t Yield To FOMO, Neither Should You

The skits highlight our instinctive need to follow the actions of others, regardless of the logic of such activities. Importantly, they highlight the stupid things we do to battle our fear of not conforming.

 

FOMO

Financial markets often experience similar behavioral herding. Most investors blindly mimic the behavior of other investors without seeking the rationality behind it.

Investors get gripped by a fear of missing out in the extremes of bull markets, aka FOMO. As asset bubbles grow and valuation metrics get stretched, the FOMO strengthens. Patient investors grow impatient watching neighbors and friends make “easy” money. One by one, reluctant investors join the herd despite their concerns.

“There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich” -Charles Kindleberger: Manias, Panics, and Crashes

Famed investors, Wall Street analysts, and the media prey on ill-equipped investors by justifying ever-higher prices.  Their narratives rationalizing steep valuation premiums become widespread. Despite evidence to the contrary and historical precedence, investors always buy the hype. “This time is different,” say the promoters.

This time is rarely different. For a better appreciation of financial bubbles built on false premises and FOMO, we recommend reading “Manias, Panics, and Crashes” by Charles Kindleberger.

Per a recent report, J.P. Morgan had the following to say on bubbles:

Both begin with a compelling narrative that eventually leads analysts to discard previous valuation yardsticks because “this time is different.” Occasionally times have changed, but often they haven’t.”

Defying Our FOMO

Our investing behaviors are quite different from our consumer behaviors. As consumers of goods, we seek discounts on products we want and shun products we think are too expensive. On the other hand, as investors, we seem to prefer to pay top dollar for stocks and avoid them like the plague when they trade at a deep discount. Dare to employ the logic of your inner consumer, not your average investor.

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