FOMO and the Importance of Doing Nothing
“There is nothing so disturbing to one’s well-being and judgement as to see a friend get rich”
-Charles Kindleberger
This quote came to mind recently after having drinks with a friend last week. With the exception of a stint abroad for a couple years, my buddy has been in school non-stop since we graduated from college in 2003. After we said our goodbyes, I thought about the discipline he must have to be able to stick with his chosen path. It had to be hard, I thought, to give the same reply year after year when asked what he was up to. “Still in school,” he must have said over and over again, at hundreds of parties, weddings, and other get-togethers over the course of the last decade. And while school certainly hasn’t held him back from reaching non-professional milestones — he’s married and has children — he’s probably thought more than a few times about his decisions and how he could be in a better financial position had he chosen a career path that demanded far less time to specialize and provided a higher income earlier in his career.
Whether he realizes it or not, my friend’s behavior displays many attributes associated with successful investing. Humans, like markets, oftentimes demonstrate a herd mentality. In the case of humans, it is generally too easy for us to ape the actions of our friends. Whether it be the profession we choose, the school we attend, or products we buy, many of us base our decisions by observing the behavior of those we associate with. The same holds true for markets. Certain assets (whether they be dotcom stocks in 2000–2002 or sub-prime mortgages in the latter half of the last decade) may be in vogue at any given time, and if your peers are getting rich by buying up certain stocks or moving into a bigger home, the temptation to partake can be nearly irresistible. The fear of missing out (FOMO) on an opportunity can be a crushing psychological burden to bear.
And when stock markets are rocky, as they were last month, and the people we associate with begin to whisper about our economy collapsing, or an impending recession, and enumerate all the steps they are taking to avoid being affected by such a calamity, there is the tendency to believe that doing something — anything — is preferable to doing nothing. What’s more, research has indicated that the risk of financial loss triggers the same physiological reaction as the threat of physical attack, discharging such fight-or-flight hormones as adrenaline and cortisol into our bloodstream. In other words, human beings are literally hard-wired to avoid investment losses.
Similarly, neuroscientists have shown that monetary gain stimulates the region of the brain — the nucleus accumbens — in ways similar to the use of cocaine. In both instances, dopamine is released, giving us a heady sensation we often seek to replicate. As Andrew Lo of the Massachusetts Institute of Technology pointed out in a May 2015 article in The Economist, “In the case of cocaine, we call this addiction. In the case of monetary gain, we call it capitalism.”
All of this leads me back to my friend. Much like a successful investor, he’s been able to stay the course, sticking to the plan he developed for himself years ago. He saw his friends making decisions with more immediate pay-offs but was able to stay focused on his goals. And at this point, he is poised to reap the financial and personal benefits associated with his self-discipline.
The lesson to draw from my friend’s experience as it relates to investing is that controlling one’s emotions is often the most important character trait to master. If you have an investment plan in place that you understand and believe in, then stay the course through the short-term ups and down in the market will throw at you. Like my friend, you’ll be glad you did.
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