Sunday Thoughts on FOMO - Fear of Missing Out

Ah yes, its another Sunday.  Time once again to consider those things which daze and amaze, confound and astound, the little games the market plays to both thrill and send chills down the spines of retail investors hoping to turn a profit by buying low and selling high.

I'm going to assume that anyone willing to read an anonymous blog on investing, that you're likely one who uses social media in hopes of uncovering what you'll discover to be a worthwhile investment.  Well, you're going to be disappointed because I'm not going to be suggesting any stocks with this post.  

On Sundays I often like to share my experience and offer it up so that others may avoid some of the mistakes I made in my younger days.  And I have to admit, that sometimes I throw caution to the wind and I continue to make mistakes every now and again.  Its that old adage about maximising gains and limiting losses that you'll often hear from gamblers.  

At the end of the day the stock market is a lot like gambling.  Even with dividend paying blue chip stocks it is possible to buy and then to get hit with bad news that sends the company's shares down in value.  Of course any seasoned and experienced market observer will tell you that, while blue chips provide excellent safety and good prospects for decent long term growth, you're not gonna be doubling your money in a short period of time.

But I'm guessing most readers already know that, and the reason you're perusing an insignificant little blog like this is that you're looking for outsized gains, with dreams of turning $1,000 into $10,000 or $10,000 into $100.000....dreaming of eventual millions.

And that's where FOMO, or "Fear of Missing Out" comes into play.  It is possible to make big returns and to turn $1K into $10K but it is incredibly difficult and far from easy.  If it was easy everyone would be doing it.  Anyone who tells you they have a sure fire method, or a sure fire 100% guaranteed winner?  They're lying, pure and simple.  I've had 10 baggers, but in looking for them I still get caught in others that lose me money.

Social media is full of industry hacks looking for the greedy and/or desperate.  These anonymous posters (anonymous just like myself) will tell you they're never wrong, and that the stock they're touting is a "no brainer" a "lock"....and they will tell you they have the "facts".  The only fact is that they're 99.9% certain to be lying charlatans.  

So how does FOMO rope people in?  Probably the most important ingredient is price movement.  Investors see a stock climb 10% in a day, and often times more....with social media full of messages about some hot and moving stock exploding, and it can be hard to resist hitting the buy button.  Maybe its a 10 cent stock that's moved to 14 cents that you had on a watch list.  That's 40% right there, if you'd invested $10,000 at 10 cents you would have had $14,000 at 14 pennies.  

So what happens?  You jump in, but not at 10 or even 14....you buy maybe 100K shares at $0.15 cents, that's $15,000.....or maybe you're a little more conservative and only risk $1,500 by picking up 10,000 shares, no matter.  You are now in the game....you're a player.  Doesn't it feel good?

People will often tell themselves (and others) that when a stock drops in value, that they haven't lost a single penny, that a loss is not a loss until the shares are sold.  But the same holds true when a stock climbs in value.  People will talk about how much money they've made on a stock, while at the same time saying they're holding their shares with an iron fist.  Well....guess what sparky?  If you haven't turned your shares into $$$ by selling, then you haven't made one single solitary cent.  

Here is what I am going to suggest.  Think it over, ruminate on it....I think you'll find it makes a lot of sense.

Firstly, if the stock you're considering is static....with little price movement and not much volume compared to historical norms, then take the time to do some due diligence, some real research.  Its not hard and it doesn't take that long.  Firstly you want to determine if this company is worthy of a long term investment, or simply as something to own over the short term.  Here are three quick suggestions:

• Has the company ever turned a profit
• When was the last round of dilution
• Do the CEO and other key execs have histories of success

I think you'll find with a lot of companies that get talked up on social media, that the answers to those questions are:

• Nope, just a growing accumulated deficit
• At least once and often times more in the past 12 months
• No, although sometimes companies bring in mid range execs from big corporations.

Now, just because the answers to the questions I just asked may all seem negative, that doesn't mean you can't make money, nor does it mean that you shouldn't maybe risk some money in hopes of making a profit.  

Just know what you're dealing with.  Think of it as dating, companies with a growing accumulated deficit, that have been diluting continually, that have a CEO whose never made a dime and maybe a key exec or two who were cut loose from some NYSE listed big name company.  Companies like this can look incredibly hot and exciting....they get your financial libido all worked up and your pulse racing.  Its just that, well....you don't want to marry them.

Know what you're getting into.  If its some hot technology, or biotech....or a sexy new consumer product, then maybe you should simply date it.  Get in, get out and if you get out with a profit and then see the stock climbing even higher still, then just cry into the money you made.  You did your DD and have concluded that its a hype job, and eventually the bubble will burst.  

In other words, don't get caught up in FOMO.  Yes there will be social media types calling sellers losers, laughing at those who've missed out on even bigger gains.  But if you sell at a profit, then you've missed out on nothing.  Those who are still holding on, or who are continuing to buy, they're risking that greater fools won't show up and be willing to pay even more than what they did.  They could end up holding the bag in other words.

Now conversely....its possible that in doing your DD, you might just conclude that a stock has a decent shot at actually making a go of it legitimately.  Perhaps they're losing money but haven't done a raise in the last year or two.  Maybe their CEO actually has taken a start up company and sold it at a profit that saw shareholders make a nice fat return. That the business itself might actually succeed and generate sufficient revenues to cover all the expenses with profits left over.  If that's the case, then maybe you do want to marry it, or to at least have a long term relationship.

Bottom line is that there is no "one size fits all" method for picking investments.....But there are emotional responses of Greed and Fear that trap even the most experienced market participants.  FOMO is something to be aware of and its something to watch out for.  If you have a stock on your radar that all of a sudden jumps, 10, 20, 30 or even 40% or more in a day or two....It might just be best to let it go, there are thousands upon thousands of public companies out there.  But if its one you think has the potential to be a long term winner, then maybe dip a toe in the water....with the realization that you're willing to hold on for the longer term and maybe even average down if there's a price correction.

That's enough for now, happy Sunday everyone, and I love reading your comments.