Introduction
A few days ago, I had the chance to watch a short video featuring Dan Ariely, who is a professor of psychology and behavioral economics at Duke University and the author of several books on how to deal with irrational behavior. The subject of the video is the recently famous "fear of missing out" (or, what specialists call the F.O.M.O. syndrome).
Here's how Ariely defines it:
"F.O.M.O. is basically a function of regret. So let's think a little bit what regret is all about. Regret is about the fact that when we evaluate our happiness, we don't just evaluate where we are, we also evaluate where we could have been. And if we think that we're here and that we could have been somewhere better, this contrast makes us unhappy."
So, this special type of fear is a consequence of the attitude of our brain to continuously engage in comparisons between the current and an hypothetical outcome, and evaluate which of the two alternatives is better.
He goes on to say that the concept of F.O.M.O. also includes a sort of "anticipated regret", which is an attempt by an individual to avoid being regretful in the future. This is used, for example, by sales people who try to induce us to visualize our future regrets and force us to buy some products or services beforehand.
Please note that F.O.M.O. is not like envy, where you usually direct your attention to others (your competitors or enemies), but it's strongly related to our past or potential missing actions.
However, even if we are commiserating ourselves for not taking the right action at the right time, F.O.M.O. is usually nourished by looking at what other people are doing and, specifically, how successful they are.
These attitude has always been part of our emotional life, but it's much more frequent and relevant today because of the effect of social media on our psyche. Most of us check our social media accounts multiple times a day, where every moment there's someone who reached a lifetime target, achieved something incredible or simply did something good which they are currently sharing. We're usually not just looking at our friends, but we get informed about the professional and personal life of many famous and successful people.
So every single day we can have the impression that we're "losing" time or opportunities, while the rest of the world is doing something important and thriving. Of course, that is not the case, but that's the kind of message that continuously impacts our mind.
How F.O.M.O can affect our investing process
A person who is affected by F.O.M.O. is obsessed by "if only" kind of thoughts. If we report that attitude to investing, the person in question could think: "If only I had bought that stock" or "if only I wouldn't have sold that stock." But we didn't, and there was probably a good reason for that, but now we're so frustrated that we only consider the negative side of it. Indeed, the fact that a stock we don't own recently appreciated in price doesn't necessarily mean that we were wrong: that's actually the mental trap.
Everyone knows that losing a certain amount of money counts more than earning the same amount, but what about losing an opportunity? Sometimes, it can hurt you just like losing real money.
What could anticipated regret look like in investing? For example, I could tell to myself: "If I'm not going to buy this stock right now, I'll regret it for the rest of my life." Maybe the company is really great and the price is not, but we feel the urge to pull the trigger even if we know that there's no margin of safety to protect us.
All in all, whatever form of F.O.M.O. is affecting us, it can screw up our well-thought investment process for reasons which are clearly irrational and only related to our emotions.
Ultimately, there's one specific emotion that can lead to that kind of situation: greed. Indeed, people who are continuously thinking "if only" are usually not satisfied with what they have or have achieved. Maybe they had pretty good investment results in recent years (there's a good probability of that because of the crazy bull market we're currently in), maybe they've even beaten the S&P 500, but they're still looking at those young kids sitting on huge returns related to GameStop (GME, Financial) stock trading.
Of course, this is a quite biased way to look at things, as for each successful person, there are many more who miserably failed: they simply don't get any first page in the newspapers or thousands of likes on social media.
How to protect ourselves
Even if we have worked hard to define our sound investment process, we're still humans. Nobody can say to be completely insensible to the pressure of F.O.M.O. or other negative influences.
What can we do, then, to protect ourselves and our portfolio returns from such bad attitudes? Ariely clearly says that there's not a lot we can do about it, as these kinds of emotions are really powerful. The only thing we can actually do is try to insulate ourselves from that huge stream of distracting information. For example, we can set up some rules that will limit our access to social media or any kind of F.O.M.O.-producing stimulus.
We can't change the way our brain works, but we can apply some countermeasures to avoid being continuously hooked by the ever increasing noise.
If I have to think about a single investor who really took this problem to heart, that is Guy Spier, founder and chief investment officer of Aquamarine Capital. He actually took the idea so seriously that he decided to move with his family from the U.S. to Zurich, Switzerland in order to protect himself from the "vortex" of Wall Street.
Here's how he describes his decision and its underlining rationale in his book, "The Education of a Value Investor":
"[...] I began to realize just how critical it is for investors to structure their environment to counter their mental weaknesses, idiosyncrasies, and irrational tendencies. Following my move to Zurich, I focused tremendous energy on this task of creating the ideal environment in which to invest – one in which I'd be able to act slightly more rationally [...] My brain would still be hopelessly imperfect. But these changes would subtly tilt the playing field to my advantage."
The solution lies in reducing the amount of information we need to deal with and, of course, in choosing the rest very carefully.
As value investors, this means trying to focus on business developments (in opposition to price moves) and trying to feed our brain with very high-quality content: articles, podcasts, books and anything we find instructive and useful.
I would add one more arrow to our investment quiver: If the huge amount of available information might confuse us, we should try to prepare for it. I often feel the discomfort of not being able to quickly analyze new companies when something important (a spinoff, a special financial or corporate announcement, etc.) is happening. Instead of only looking at our portfolio companies, we should be determined to analyze those that we think deserve to be marked as quality ones, independently from their current valuation.
This will help us to act more rationally when we quickly need to make a decision, either because of a corporate deal or because the price reached a level where we think they comply to our margin of safety requirements. The best investors can study their potential investments for many years before deciding to get aggressive and pull the trigger.
Conclusion
"Fear of missing out" is a psychological anxiety caused by our human tendency to have regrets. Investors very often experience this kind of bad emotion, especially when a bull market reaches the bubble territory.
Nowadays, F.O.M.O. is getting even more common and relevant because of the negative effect of social media. Unfortunately, we can't eliminate this aspect of our mind, but we can try to protect ourselves by isolating ourselves from the continuous stream of (often useless) information we're continuously exposed to.
Setting up rules in order to limit and control it, focusing on really relevant information, and preparing ahead of time can lead to more rational behavior, and consequently to higer investment returns (and a less stressful life).
Disclosure: The author does not own any company mentioned in the article.
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