Saturday, May 28, 2016

What Do Investing FOMO and Over-Eating Have In Common?

There's nothing more frustrating than seeing an asset that you had on your watchlist go up by 50% before you've had time to do work on it, or before you manage to pull the trigger. If you're anything like me, this experience causes profound feelings of regret.

Why do we have these feelings? I see at least four possible reasons:

1) Greed. This seems like an obvious one. But I don't think it's the main driver, at least for myself. It's interesting that I usually think "I can't believe I missed that 50% move", rather than "I could have made $X! And bought so much with it!"

2) The missed opportunity to seem smart to colleagues and other investors. I confess to this one. It's totally understandable - we're social creatures and desire the approval of our peers. But dulling those urges for peer approval is necessary for actually earning outstanding returns. As I argued in a recent post, the exceptional investor will at times appear imprudent, and possibly deviant.

3) Professional pride. I see this one as related to (2), if slightly different. The feelings of regret are magnified if the recently appreciated asset is in the sectors I follow, or a company I used to own. Again, it's a natural emotion, and one which can be a positive spur to performance - in moderation. 

4) The fear of missing out. This is the one I really want to focus on. There's a fine line between greed and the fear of missing out (FOMO), but the two often appear identical to outsider observers. 

First, a quick digression on over-eating. I hate wasting food, and if someone in my family offers me the last bit of something delicious, my instinct is always to say yes. It's not just simple greed. The more I've become aware of this, the more I think it has deep underpinnings in evolutionary psychology. At some level, I believe, there is part of me that fears that if I don't use the resources at my disposal and consume the food, I will face hunger and possible threats to my survival. That might sound a bit nutty, but there is certainly some evidence for it in psychology. So despite the knowledge that I am (mercifully) unlikely to go without food for long, these pangs occasionally drive me to eat more than I need to.

Back to investing. I think, at some level, we fear missing out on investments because we fear we will never have similar opportunities again, and that we will be forever denied those scarce resources. We seem to be particularly susceptible to FOMO when we know people who have profited from the move (seeing the resources "consumed" just seems to chafe more). Investing FOMO also seems to be heightened in asset classes like real estate, where there appears to be a deep psychological fear of being denied shelter. In fact, there's academic work that backs this up. (The analogy between chasing returns and over-eating isn't perfect. Over-eating delivers an excess of calories. Chasing returns usually results in negative performance. But both of those are unhealthy outcomes!)

I take two things from this realization:

a) Be aware you are subject to investing FOMO. It happens sometimes. But it probably happens less if we restrict our investing to areas where we can build up a deep wealth of experience and information. A former boss used to sagely remind me, "You can't dance with all the pretty girls" if I was frustrated at missing out on something. (I may have taken his words to heart much more than he intended. I got married while working for him.)

Furthermore, markets are cyclical, and hard as it is to believe in the moment, it's quite likely that we'll get other shots. Rather than fixating on the opportunities we've missed, there are other things waiting to be discovered. As Irving Kahn reminded Peter Cundill, "There's always something to do."  

(As an aside, when someone offers me delicious food, I try to take it home, rather than eating it on the spot. This seems to convince me that I will in fact enjoy those resources at some point, just at a later time. Psychological tricks seem to work in eating as well as in investing!)

b) Try and recognize when other investors have been swept up in FOMO. Buffett's dictum to be "fearful when others are greedy" is generally wise. But we also need to be fearful when others are fearful (of missing out). My guess is that a great many people who got caught up in the US real estate boom prior to 2007 weren't greedy, but just misguided. Sadly, it seems a cruel truth that it's those who attempt some discipline who usually capitulate right at a market top.

Investing FOMO is a powerful emotion. But being aware of it in ourselves and others is the first step to weakening its hold on us - and our investing decisions. 

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