“Buy low, sell high.” It’s the most fundamental investment lesson that we’re all taught and one that most of us can recite by heart. But when it comes right down to it, how many of us actually subscribe to those words of wisdom? Warren Buffet, sometimes called the best investor of all time, once famously said, “Be fearful when others are greedy, and greedy when others are fearful.” He’s right, of course, but when that looks like going “all in” when the economy shuts down in March 2020 during an unprecedented global pandemic or taking money off the table when loads of people on your social media feed are boasting about the “easy money” they’re making from investing in GameStop or cryptocurrency, the decisions start becoming a lot more complicated. We’re humans, not robots, and are socialized from birth to “follow the herd.”
Striking out on our own and doing the opposite of what all the “chatter” is dictating is hard and lonely. When I was studying Economics for my bachelor’s degree during the 1980s, my professors taught that markets are always “rational.” Fast forward to the new millennium, and a new arena called “Behavioral Investing” has taken center stage. People are emotional beings and often invest based on emotions which have been shown to impact long-term investment returns significantly. According to a 2018 article in Kiplinger’s Personal Finance, fear is the biggest driver of individual investor behaviors, and those fears can be broken down into two camps: FOMO and FOLE.
FOMO is the “Fear of Missing Out” and is perfectly illustrated by the stock market frenzy surrounding GameStop and AMC in January 2021. The social media platform Reddit and its forum Wall Street Bets featured thousands of young investors goading each other to buy these two stocks, particularly at the beginning of the year, and posting continuously about the outsize gains they were making. What was most startling to me and most professionals were also the boasts by these individuals that they had absolutely no idea what they were doing but were still making money hand over fist. The narrative was that anybody could make boatloads of money in a short time horizon and that professional money managers, particularly hedge funds, were greedy, just trying to rip off “the common man or woman,” and you could do it yourself and become rich without any specialized knowledge or training. In January 2021, GameStop surged 1600%. That sure does sound like “easy money,” but there were wild speculative swings all month and in the ensuing months, and many who thought they would be retiring at the ripe old age of 35 are now in a world of hurt.
FOLE is a little different. The “Fear of Losing Everything” was captured in 2008 at the beginning of “The Great Recession” and in March 2020 with the pandemic lockdown. I also often get a taste of FOLE from new clients whenever I introduce the idea of investing in stocks. Over and over again, I have been told that a new investor is afraid that their stock holdings will “go to zero.” Let’s think about it. Most stock mutual funds hold an average of 100 or more individual stocks. For that fund investment to go to zero, every one of those stocks would need to declare bankruptcy. Likely? Nothing like that has ever happened in history. Possible? I guess if we were suddenly in the throes of Armageddon, but then we’d all have bigger problems than the value of our investment accounts.
What’s concerning to me is how widespread the “market mania” actually is. Since the beginning of the year, I’ve had senior investors who have never invested in anything other than bank Certificates of Deposit and savings accounts call me every week with questions about how they can invest in cryptocurrencies or the latest hot stock tip about which their millennial grandkids told them. They hear about money being made and want their share. Remember Warren Buffet: I hear first-hand about a lot of greed, and it’s making me fearful. MSN Money reported in April 2021 that 1 in 5 investors say they’ve made investment decisions based purely on something they read on social media. Further, 80% of those investors only began to invest in January of this year. And it isn’t just our young.
With help from Investing.com, Business Insider did a nationwide survey of investors of all ages on 04/17/21. A full 47% reported that they had either purchased GameStop or AMC in the past 3 months! I’ve been investing for over 40 years in all kinds of market conditions and “bubbles.” People like to justify their actions and say, “This time is different.”. Guess what? It really isn’t. A lot of what is going on right now in the markets is not investing but gambling. Please be smart. You work too hard for your money to blow it in a fit of FOMO. Even in lofty markets, there are always good buys and investment strategies that will serve you over the long haul. I would love to be your guide. Please call me at 563- 949-4705 or email me at [email protected].
Securities offered through J.W. Cole Financial, Inc. (JWC) Member FINRA/SIPC. Advisory services offered through J.W. Cole Advisors, Inc. (JWCA). Huiskamp Collins Investments, LLC and JWC/JWCA are unaffiliated entities.