FOMO (Fear Of Missing Out) Is Bad For Money

You see a stock go up and you want to buy. You buy and it plummets immediately. You tell yourself “I’ll never purchase an asset again based on FOMO,” only to repeat the mistake again a few months later. Conversely, you buy something that’s profitable. You don’t sell because you fear you’ll miss out if the stocks skyrocket. It plummets back below your purchase price and you lose money.

Lesson: by the time you feel FOMO about something, the opportunity’s gone and it’s too late. When you feel FOMO, you’re already the “greater fool” in the “greater fool” theory, meaning you’ll definitely lose money. One misconception about FOMO’ing is this:

Well, I can’t be the last person the buy. I’ll just get out quickly and ride this hype train up and then sell at the first sign of trouble.

It’s a misconception because it’s called greater fool theory, not the greatest fool theory. Consider 100 investors in the same opportunity, and you’re the 60th investor to catch the hype. There are 40 more investors behind you. Here’s how you’ll all lose money:

  1. Investors 1-10 spot an opportunity and buy in. They’re early adopters and don’t move the price much.
  2. News spreads sand investors 11-20. The volume and the price increases.
  3. Investors 21-59 drive up the price and volume even more over a few weeks, giving the stock a parabolic growth curve.
  4. Investor 60 (you) hear about this opportunity on the news and buy in. As does investors 61-80.
  5. At this time, investors 1-20 feel like their profits are good enough and sell, driving the price down massively.
  6. Investors 81-100 buy in because they feel like it’s a small pullback and the growth will retrace. Simultaneously, investors 11-40 take their profits, and investors 60-69 panic sell. This drives price down even more.
  7. All remaining players sell off due to either taking profits or panic selling.

As you can see here, investors 60-100 can all lose money here.

The reason why FOMO is not good because the feeling of FOMO arises when you hear about something too late and you feel like you’re missing out. That is, you’ve passively encountered an opportunity via osmosis instead of proactively discovering it. By the time the osmosis of the news reaches you, there are already enough market players that are highly incentivized to sell to drive the price down.

Using FOMO To Trade

FOMO makes you an extremely bad trader. The market is a zero sum game. Thus, do the opposite of what you FOMO and you shall receive large profits. Examples:

  • You feel strongly about catching this parabolic ‘wave’ of gains. Consider shorting instead.
  • Your position has risen 100% in a day. You want to buy more so the position doesn’t run away further away from you. Consider liquidating everything immediately. Nobody ever went broke taking a profit.

The Hard Part

Going against a very strong emotion like FOMO is like jumping off a cliff. All your instincts are screaming “NO!” and you have to somehow go against it. Not once, but for every trade.