Written by: Corey Janoff
Remember when you were in high school or college, and your friends invited you to go somewhere or do something with them? You had to do it! You didn’t want to miss out on the fun and excitement. You may still be that way today. I know some people that are social butterflies and always seem to be doing something fun.
A few of us are going out for pizza – care to join? Just tell me when and where and I will be there.
Do you want to go to that party this weekend? I heard that cute girl that you have a crush on will be there. Um, heck yeah! Are we going to get together beforehand?
It’s supposed to be nice this weekend, and so-n-so wants to take us out on his boat. Say no more.
You were so opposed to saying no to the fun activities with friends because you felt like you would miss out on something memorable. You always regretted the things you missed out on because you would hear about it the next day. “Oh man, you should have been there! You won’t believe what Steve did!” In life, you regret the things you don’t do much more than the things you do.
There is a reason parents give their kids a curfew. If parents didn’t, the kids would never come home because they don’t want to miss out on the fun.
How This Relates to Investing
This mentality affects investors in the same way it affects high school children. The fear of missing out is real.
What was popular in the late 1990s? I’m not talking about Beanie Babies and Backstreet Boys (although those took the world by storm). Internet stocks were the big sensation for investors. Everyone and their mother was investing in internet companies. And they were making a truckload of money doing it! People were quitting their jobs because they could make more money in a month trading internet stocks than they could make all year working nine to five.
Everyone was pouring money into internet companies because they heard their friends were making money doing it, and they didn’t want to miss out. If you weren’t investing in internet companies, you were missing out on a once-in-a-lifetime opportunity.
One person who didn’t invest in internet companies was a guy named Warren Buffett. His investors would beg him to invest some of Berkshire-Hathaway’s portfolio in internet stocks. Warren, who has only averaged about a 20% annualized rate of return per year for the last 50 years, was generating lackluster returns compared to the internet companies whose stock prices would double in a matter of weeks. He probably ended up losing a lot of investors during that period.
Being a diligent investor, Warren couldn’t understand all the rave about these companies. Most of them weren’t even profitable! Investing in something that didn’t even make money goes against every rule he has about investing (Rule #1: don’t lose money. Rule #2: don’t forget rule #1).
I think we can all agree in hindsight that Warren made the prudent decision. Still, many investors at the time had to invest in those internet companies for fear of missing out on the opportunity they presented.
Graph of the NASDAQ stock index from 1995-2003, source: Yahoo! Finance
We saw the same phenomenon in the mid-2000s with people over-leveraging themselves to invest in real estate properties. You can buy a house with no money down (even if you have little to no income) and sell the house a few months later for a significant profit. Easy money. Many people quit their day jobs to engage in this activity for fear of missing out on a real opportunity to get rich and retire early.
A handful of years ago, when a particular social media company went public, I received several calls inquiring about investing on the IPO. There was a lot of media attention surrounding the public stock offering of one of the most popular and commonly utilized companies in the world. Investors didn’t want to miss out on an opportunity. I don’t think the company is going away, but their stock has been on a steady slide down ever since they went public. Once they figure out how to monetize the platform, that could change, but who knows if and when that will happen.
We are possibly witnessing a similar fear of missing out today.
A certain car company is worth more than every car company in America combined, yet produces far fewer cars. Only time will tell if this company is the real deal or if investors will find themselves extremely disappointed.
A handful of technology companies today have seen their stock prices rise significantly in the last year.
Cryptocurrencies seem to be the latest craze. Some of them have risen over 500% in value this year alone! If any of them become widely adopted and accepted forms of currency, they could see their value skyrocket. But if they don’t….prices might fall back down to Earth.
Every investor is looking for the next big thing that starts from the ground and revolutionizes the world in a few short years. The problem is, for every one of those companies, hundreds fizzle out and fade into the sunset. Some of the most popular and valuable companies 20 years ago don’t even exist today. And some of the most popular and valuable companies today didn’t exist 20 years ago!
It is so hard to predict the future. Pouring all of your money into one or several companies, hoping to hit a home-run and retire early, is a dangerous game to play. Odds are, you are more likely to strike out than strike gold.
Also, you don’t need to hit home runs to win at the game of investing. You just need a diligent savings plan and a diversified portfolio. Getting rich slowly is much easier than getting rich overnight. It may not be as exciting, but it is more probable. Besides, most people that win the lottery go broke within a few years because they don’t know how to handle their newfound wealth.
I’m not saying you shouldn’t dabble into the latest investment du jour, just don’t bet the farm on it. If you have a few extra dollars within your savings plan to “play” with, then go for it. But instead of having a fear-of-missing-out-on-the-opportunity mentality, fear the possibility of big losses. Those are the ones you want to miss out on.