“Men, it has been well said, think in herds. It will be seen that they go mad in herds, while they only recover their senses slowly…
“Men, it has been well said, think in herds. It will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”
The “fear of missing out” — a disease that has plagued not only our social life but also how we invest. Things these days never seem to be neutral. Information overload paired with misleading or exaggerated signals has reduced our ability to critically assess and think. Our brains can’t handle it and eventually emotions overtake rational thought. Whether you actually make the trade or spend countless hours trying to decode these mixed signals, the common investor loses.
Today, most market trades are done using indexes or algorithms on a sub-minute basis with hundreds of millions of dollars. You might just be trying to get across the sea, but good luck getting through a patch of 50 foot waves made by boats — or should I say destroyers — 1000x your size, without any scars or bruises. The only way to survive is to distance yourself and play on a different playing field.
Just look at Zoom’s stock in the last couple weeks. It’s trading close to a 1800 P/E ratio. It’s market cap valuation surpasses Walgreens, eBay and several other major tech companies. Don’t get me wrong, Zoom is an outstanding company — one of the few unicorns that was profitable out of IPO but price matters — there will be a lot of investors who end up burned by this temporary charade.
The most important factor for investors across any sector (stocks, real estate, etc.) is comfort with your investment which requires an understanding of pros and cons. Consider the most convincing reason against an investment. Without having a detailed response to this, your decision making process is flawed. More likely than not, you are suffering from FOMO. Hunches aren’t enough to withstand volatile ups and downs.
At the end of the week, the machines will leave the chips as they found them +/- an insignificant amount. But for everyone else, what really matters is how many investors are buying into the vision of a company over an extended period of time.
Conventional wisdom is conventional for a reason: for the most part, it stands the test of time. It should be no surprise that in the hysteria of a boom or bust, wisdom is discarded for the prospect of a quick buck. But no one’s life is as good as their Instagram story and a stock’s health isn’t best determined by its daily seesaw fluctuation. If you keep looking at it, it will affect your judgement.
What to do
Resist the urge to invest based only on the expectation of profiting from a plunging market. Put your brain to work. Take the time to review a company’s financials. Understand the competitive environment surrounding the company and try to predict whether it has the potential to be an industry leader or if it will be wiped out by an emerging power.
And if you aren’t sure what to do, proceed cautiously and invest thematically. Investing in the market for the long run isn’t the sexiest move, but will protect your investments from volatility while securing a consistent return.
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Thanks to Khadija, Mohsin and Ghiyath for contributing and reviewing drafts of this.