By Dan Steinhart, Managing Editor, The Casey Report
I heard this acronym on a podcast last week. Having no clue what it meant, I consulted Google.
Turns out it stands for "Fear of Missing Out." Kids use it to describe their anxiety about missing a social event that all of their friends are attending.
It struck me that investors experience FOMO too. And it usually leads to bad decisions.
From Prudent to FOMO
In the comfort of your home office, investing rationally is pretty easy. You think a bull market might be emerging, so you invest in the S&P 500.
But you're not stupid. No one really knows where the stock market is headed, so you keep a healthy allocation of cash on the side to deploy the next time stocks trade at bargain prices. A prudent, rational plan.
But leave the house and things start to change. You notice that others seem to be making more money than you. First it's the "smart money" raking in the dough—those who had the foresight and fortitude to buy during the last panic, when everyone else was retreating. You’re OK with that. Investing is their full-time job. You can’t expect to compete with them.
But as the bull market charges higher, the caliber of people making more money than you sinks lower. The mailman starts giving you stock tips. And your gardener's brand-new Mustang, parked in your driveway just behind your sensible, 2011 Toyota Corolla, starts to irritate you.
Your brother-in-law is the last straw. He thinks he's so smart, but he's really just lucky to somehow always be in the right place at the right time. I mean, just last month you had to pick him up from a NASCAR tailgate after security kicked him out for lewd behavior—and now he's taking the family to Europe with his stock market winnings?
If that guy can make $30,000 in the market in six months, you should be a millionaire.
Now you feel like a sucker for holding so much cash. Why earn a pitiful 0.5% interest when you could be making… hang on, how much did the S&P 500 gain last year? 29.6%?
Some quick extrapolation shows that if you invest all of your cash right now, you can retire by 2023. Factor in a couple family trips to Europe, and we'll call it 2024 to be safe.
Cash Is Trash… Until It’s King
Such is the (slightly exaggerated) psychology of a bull market. FOMO is a powerful motivator and causes smart investors to do stupid things, like go all-in at the worst possible moment. Which is no small concern, since it undermines one of the most powerful investment strategies: keeping liquid cash in reserve to invest during market panics. Continue reading "You Can't Shoot Fish in a Barrel Without Ammunition"