One of the most powerful forces in the market is the fear of missing out, commonly referred to as FOMO. FOMO impacts the retail investor who grows frustrated as he watches others celebrating their great success in a roaring market, and it also impacts professional money managers that fear underperforming their benchmark indices more than anything else.
The problem with FOMO is that it is a prelude to a lack of discipline and poor decision-making. It is the excuse that is used to do things that we know we shouldn't do. It is the product of frustration and a lack of patience and can be extremely dangerous if we give into our reckless impulses.
Ever since the 2008-9 bear market, there has been a greater frequency of V-shaped moves in the market. One of the primary reasons for this action was the flood of liquidity produced by the Fed. Another reason is computer algorithms that are programmed to drive momentum using ETFs and indexes. V-shaped moves reward chasing strength, and they make FOMO seem less irrational. When extended stocks become even more extended, then it is not illogical to fear missing out if you don't rush to buy. It is working for someone, so why shouldn't it work for us as well?
We now have a hawkish Fed that is not producing endless liquidity, but we still have V-shaped moves because that is the nature of bear market bounces. Poor positioning is what causes the feeling of FOMO to become even more pronounced, and that helps to drive these big counter-trend moves that feel like they will never end.
The best way to deal with FOMO is to constantly remind yourself that there is always another opportunity around the corner. It doesn't matter if it is a wild bull market or a horrible bear market. If you stay patient and keep looking, you will find another attractive opportunity.
FOMO goes hand-in-hand with the inclination of market players to put too much emphasis on trying to time exact market turns. If you focus on trying to call exact bottoms and tops, then you will always be worried that your timing is imprecise, and you will be inclined to fix the mistake by chasing the move.
FOMO Can Be Extremely Dangerous
The current market environment is a good example of a situation where FOMO can be extremely dangerous. The market has been extremely strong, there are many folks proclaiming that the bear market is over, and anyone that has been disciplined during the bear market is likely holding high levels of cash.
The problem is that after the big and fast move off the June lows, many charts are extended and need consolidation or tests of support levels. There simply aren't good entry points, but if you are wrestling with FOMO, then you want to ignore the technical analysis that keeps you safe. You want to chase stocks higher because the momentum is so strong and shows no signs of slowing. It has worked quite often in the past as V-shaped moves develop, but the risk of being caught in a bull trap is extremely high.
Chasing stocks can work well, but if that is the style you are going to embrace, then you also need rigid discipline. The biggest losses come when you chase a stock and then just sit there when the trade does not work, and it collapses.
The best way to deal with FOMO is to be very aware of the emotion and ask yourself if you are buying a stock because it offers a good entry point or if you are just frustrated that the market is moving without you.
As someone that focuses on trend following, I am never fully invested at turning points, but I have always found that as a new uptrend or bull market develops, I have no problem putting cash to work in a prudent manner as new opportunities are created. You don't have to chase aggressively to catch strong momentum.
The great thing about the market is that there is always a new opportunity. You need not fear missing out because, I guarantee you, that there will be another chance tomorrow.