As the bitcoin price gets crushed amid the Crypto Winter, financial commentators are warning stock market investors to not fall prey to reckless buying decisions rooted in FOMO (fear of missing out).
As crypto bulls are aware, FOMO was cited as a key driver of the record bitcoin price at the height of the crypto bull market in December 2017.
“The most powerful force in the market is fear,” financial commentator James DePorre writes at Real Money.
When fear of losing takes hold, it creates powerful downside momentum. And when fear of missing out (FOMO) takes hold, it creates powerful upside. The recent market action is ideal for creating fear of missing out.
DePorre pointed to the example of Facebook, whose stock soared this week after it beat analyst estimates for Q4 earnings and revenue. For the fourth quarter ended Dec. 31, the social media monopoly earned $2.38 a share on revenue of $16.9 billion.
Wall Street analysts had expected Facebook to earn $2.19 a share on revenue of $16.4 billion. Shortly after Facebook beat analyst estimates on both the top and bottom lines, its shares surged on heavy buying action.
But James DePorre cautions investors to not impetuously follow the herd, which moves in lockstep based on daily stock fluctuations. This is a trend mirrored in the crypto market, where plunging cryptocurrency prices lead to noisy, premature wails that bitcoin is dead.
Despite Facebook’s strong week, keep in mind that it’s still struggling with the ongoing data-breach scandals that tanked its stock just months ago. A good week does not mean the embattled company is out of the woods yet.
DePorre explained that FOMO often leads to overly aggressive dip buying, while the fear of losing out triggers irrational selling. Both approaches suck because the animating emotion driving them is primal fear, and not rational analysis.
The Fear of Missing Out is the main driving force in this market, but that doesn’t mean that we have to embrace that emotion ourselves. Stick to your methodology and don’t let worry of underperformance push you to shift your approach.
So what’s the solution to fear-based investing? A rational reliance on fundamentals, and a steadfast approach to the latest news that’s moving the stock market.
For example, right now there are differing opinions about whether a US recession is imminent. Perma-bears like Robert Shiller ― the bitcoin-bashing Yale University professor ― insists that one is around the corner. And what does he base his gloomy outlook on? Why emotions, of course!
Shiller ― an academic who has never worked in the private sector ― predicts that a protracted bear market looms on the horizon, based on “psychology” and “narratives” ― not based on market fundamentals.
I’m writing a book on ‘narrative economics,’ and think it is stories that drive markets more than fundamentals.
So Professor Robert Shiller is predicting a harsh bear market while writing a book about how “bear-market narratives” can trigger them. Let that sink in.
Meanwhile, economists who have real-world experience with money say concerns over an imminent recession are emotionally-based and overblown.
Mohamed El-Erian — the chief economic adviser at German mega-bank Allianz — warned that the breathless media hysteria about an impending recession could actually trigger one. So we should be careful what we put out into the universe, he warns.
“I’m stunned by all this talk of recession,” El-Erian told CNBC in December 2018 (video above). “We’ve got to be careful because we can talk ourselves into a recession. That’s how bad technicals become bad economics.
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Last modified: July 13, 2020 1:38 PM UTC