On January 24th, 2022 – the Dow Jones Industrial Average opened at 33,665.15 and fell as low as 33,274.09 before closing to a high of 34,383.66.
It had fallen almost 400 points and then recovered to a increase on the day of 718.51.
It was a 1109.57 point swing (approximately 3.3% based on the Dow’s open).
The S&P 500 did something similar. Opened at 4,303.12 and fell to 4,239.30 and closed at 4,413.22 – another massive swing.
On days like that day, it’s very tempting to think that you can take advantage of the volatility. That if you had the guts to buy at the low, you’d have gotten an easy win.
There’s the feeling that you “missed out” – especially when you look back on how quickly things recovered.
If this describes you and you want to shake that feeling of FOMO, read on:
Table of Contents
Hindsight is Unfair & Incomplete
You only feel FOMO because you saw what happened. It’s an unfair advantage you have against the who you were at 12:30 PM on Monday – when the market was at its low.
You also may have forgotten that on Tuesday, the markets opened lower before (again!) ending up higher on the day but still lower than Monday’s close.
You may have also forgotten that some of the indicies had entered (Nasdaq) or were close to correction territory (a loss of 10% from highs). The pandemic was still happening, inflation was still high, the Fed was set to increase interest rates, etc.
Even crypto was down big and had been down big for months (high of $67k in November, down to $36k on Monday). Mood was not good.
Your hindsight may be 20/20 but it’s incomplete and doing you a disservice. You think you may have missed an opportunity now but in the moment, there’s no chance you would’ve (or should’ve) made a move.
Scarcity is a Bias
FOMO, whether investing or otherwise, relies on a cognitive bias known as scarcity. We assume that when things are scarce, they are more valuable (gold has value strictly because it’s scarce!). We may, and often do, make bad decisions when influenced by this scarcity bias.
We don’t want to miss out on a great opportunity and so we may jump on something we otherwise wouldn’t have. This is made worse when there are other heightened emotional aspects to it, like when the market is down and we’re worried about our money.
This is why a lot of merchants will say that their sale or offer is available for a limited time – you don’t want to miss out on this “once in a lifetime opportunity!”
In this case, scarcity has to do with the investment. We feel that this moment is singular and rare but it’s not.
Opportunities are everywhere in the stock market. And they appear frequently. You may miss out on what seems like an opportunity today but there will be one tomorrow. And the next day. And the next.
What Goes Down, Can Keep Going Down
“Don’t catch a falling knife.”
The number of times the market has made that massive of a recovery are extremely rare (the last time was October 2008 and that was in the Great Recession). The number of times the market goes down and keeps going down that day are numerous.
With indicies, and their numerous companies, you may not be tempted to buy into a fund when it goes down. We tend to reserve that for individual companies.
One company I’ve kept an eye on is Peloton. We own a Tread+ and it helped me start running more regularly during the pandemic. I pay attention to the company and the stock because of the potential impact on the product and service, less about an investment opportunity.
Here’s the 5 year chart:
What you’re seeing is the massive gains during the pandemic and the subsequent decline, here is a 1 year chart.
If you love what the Peloton community and service is all about (and I do), at some point you may have been tempted to buy the stock.
On October 12th, 2021, you may have thought to yourself – “Self, the company is now half the price it was just 10 months ago… should I buy some?”
Things that go down can still keep going down. I don’t know what a fair valuation of the company is. I don’t know if investors have lost faith in the CEO. I don’t know any of that. I do know that I’m not investing in the stock even though I love the service and the product.
You Have Other Things to Do
Unless you are a full-time stock trader or fully retired and play with a small portion of your nest egg, you have other things to do. You don’t have the time to watch the market like a hawk and be there when the right moment strikes (if you are even able to identify it).
And even if you were, you probably wouldn’t have known the right time to pull the trigger.
The point I want to make is that your time is precious and you likely don’t want to spend it sitting at your computer refreshing a screen.
In fact, more to the point, you don’t want to do it every single day so that you don’t miss out on the moments (if you’re even able to identify them in the first place!) when they occur.
I’m going to share with you an analysis of Bitcoin that should make you question your expertise. It’s of Bitcoin so it’s super clean – it’s a currency.
First, read this anatomy of a bitcoin price manipulation.
A few things jump out at me – experts who can do this type of thing use tools and services we’ve never heard of. You may have heard about Bloomberg terminals or Level 2 market data, but that’s just the surface of the stock market.
The expertise about how the markets work, or can be manipulated, is another layer. The bitcoin manipulation analysis is fun to read because it starts with things that make sense (news stories, albeit planted ones, followed by wash sales) and starts entering territory that may be foreign to you (it was to me).
The term “momentum ignition” means nothing to me but the explanation is super simple. You place a large attractive order and then cancel it when the opposite order is placed (usually by a bot), which leaves the opposite order hanging there. Then things go crazy.
Finally, go back and read the timelines… it was all in seconds. These were all bots. You don’t have bots.
I know people that do this for a living and their tools are different. Their understanding of the markets is different. This story was about bitcoin but you better believe it exists in the stock market too – that’s why there are flash crashes.
BTW, It’s Just Market Timing
In the end, investing FOMO is really about market timing. Everything you know about the ills of market timing are also true about this feeling of investing FOMO.
You feel FOMO because you missed out on the market increase. But it could’ve just as easily been a market drop.
When you try to time the market, sometimes you get it right and sometimes you get it wrong. Without an edge, are you able to get it right more often than not? Who knows.
And even if you do get it right, at what cost to your time, energy, and stress levels?
For some – it’s fun and you know it’s gambling, go for it.
For others – and especially if this is your nest egg, I’d seriously reconsider it.