The Biggest Killer of Investment Returns

Somewhere, right this very moment, an investor you know of is having more fun than you. He has made a lot of money – more than you – in the stock market surge of the past few months. And you missed out on it.

In fact, you may even know of someone who owns all the stocks that are rising, and you are cursing yourself for not being that person, plus envying him.

Not just that, looking at your portfolio you realize that somewhere, something isn’t right. There’s one stock, or maybe more, that hasn’t done much even when other stocks you don’t own have skyrocketed.

I know this affects you, annoys you. And that’s a normal emotion to have, and one you have no control over, which is also normal. Your lizard brain – part of the brain that is responsible for primitive survival instincts such as aggression and fear – is hardwired to behave that way.

So, even when you own more assets and privileges than you could have imagined by this age, and are reasonably happy in your life outside stocks, you feel terrible because you missed out on a few stocks that have done wonders for other investors you know of.

Wait, I haven’t even touched upon social media that profits not just from connecting us, but mostly from magnifying emotions we don’t want in the long run. Need proof? Remember when you were having a great day recently, someone posted on Twitter how a stock he had bought three years back had turned into a 30-bagger?

“Huh! Big deal!” you had exclaimed, and then went back to your portfolio only to realize that the best performer there was, maybe, a 5-bagger and, that too, over a five-year period. Your day was ruined!

Let me tell you something about myself that only my family and close friends know. I have this recurring dream, while I sleep at night, that I am missing my train. And not by a far distance, but that I am running after it only to see it disappear in thick smoke.

I have seen this dream so many times that I have never missed a train or a flight ever. How? Because this fear of missing out leads me to reach railway stations an hour and airports minimum two hours in advance. Thanks to this fear, I am rarely late for meetings too.

So the fear of missing out, what scientists call FOMO, isn’t such a bad thing as far as its role in our lives is concerned. In investing, though, it often leads us to big problems.

A lot – I am willing to bet, most – of the decisions we take as investors are driven by FOMO or the fear of missing out on the gains others are making or have made in recent times. This, by the way, is also a result of another deadly emotion i.e., envy.

I have been guilty of buying a few stocks in my early investment career – the 2005-2007 period – under the influence of FOMO plus envy. I made some money on some of those stocks because we were then in a bull market. But, net-net, I suffered.

And not just with me who started investing only in 2003, I am sure FOMO existed even with investors in 1983 and 1993. But we have now taken this fear far beyond, thanks to the supercomputers in our pockets, and amplified by our usage of social media. In fact, media and social media brings FOMO right to you, wherever you are, with a mere beep or vibration or with opening and closing bells.

FOMO isn’t such a bad emotion to have in general, especially because it can help you avoid missing trains and flights. However, when it comes to investing, the dangerous side of FOMO comes to light when investors act under its influence and buy stuff they either don’t need, or don’t understand, or shouldn’t touch.

Not just mortals like you and me, even the world’s best investors have suffered from FOMO from time to time and have hurt their wealth and reputations. Like Stanley Druckenmiller who bought tech stocks at, well, near the top of market in 2000 because he had two internal managers who were making about 5% a day and he just couldn’t stand missing out on the party. He put billions of dollars in within hours of the top. And then, his portfolio return was destroyed over the next few months.

Now, there’s no point poking fun at even Mr. Druckenmiller who may have fought and lost against his brain that missed evolving even over a thousand years.

Talking about the brain, let me bring in Yuval Harari here, who wrote this brilliant book titled Sapiens, chronicling the history of our species. In this book, he talks about a ‘gorging gene’ theory –

…we need to delve into the hunter-gatherer world that shaped us, the world that we subconsciously still inhabit.

Why, for example, do people gorge on high-calorie food that is doing little good to their bodies? Today’s affluent societies are in the throes of a plague of obesity, which is rapidly spreading to developing countries. It’s a puzzle why we binge on the sweetest and greasiest food we can find, until we consider the eating habits of our forager forebears.

In the savannahs and forests they inhabited, high-calorie sweets were extremely rare and food in general was in short supply. A typical forager 30,000 years ago had access to only one type of sweet food – ripe fruit. If a Stone Age woman came across a tree groaning with figs, the most sensible thing to do was to eat as many of them as she could on the spot, before the local baboon band picked the tree bare. The instinct to gorge on high-calorie food was hard-wired into our genes.

Today we may be living in high-rise apartments with over-stuffed refrigerators, but our DNA still thinks we are in the savannah. That’s what makes us spoon down an entire tub of Ben & Jerry’s when we find one in the freezer and wash it down with a jumbo Coke.

So, well, the need to gorge on all available sweet fruit under the fear of missing it out to the local baboon remains with us to date. We gorge on the food we know is bad for us, and stocks we understand may be risky to us. This is because we fear missing out on the instant gratification we may get from consuming/buying them.

In such situations, our lizard brain is on high alert to make sure that everything is okay with us. The lizard brain can’t rest until it knows that everyone likes us and our portfolio of stocks, and that all price charts are moving up north, and that we are all set towards an assured bright future.

But of course, as you may have witnessed or heard from older investors, the future (and the present) of the stock market isn’t perfect. It can never be. And when you combine this i.e., the imperfections of the market, with imperfections of our brains that causes the FOMO, you get a cocktail that is often deadly because it is not handled carefully.

What is more, this cocktail of fear caused by FOMO and our intrinsic need to be happy lays the ground for us to be, well, unhappy and dissatisfied with our present state of being, including our present portfolio of stocks. We are always searching for something newer, brighter, exciting, and more profitable.

You see, it’s sometimes good to be dissatisfied as an investor when it comes to working hard in search of finding ideas. That way, your dissatisfaction is a product of your inner scorecard. However, when this dissatisfaction is caused by measuring yourself against the instant updates on what others are doing, buying, and shouting about, that’s what causes you much pain and leads you to poor decision making.

I have learned this lesson the hard way, and have been lucky to turn my FOMO into JOMO, which is the ‘joy of missing out.’ I still do stupid things as far as my investments are concerned, but I take complete responsibility for those stupidities, and that keeps me away from repeating my mistakes.

I can understand that FOMO is a powerful motivator, but also understand that it often causes even the smartest of investors to do stupid things, like go all out at the worst possible moment, a la Druckenmiller. It’s one of the biggest killers of investment returns.

Missing out on the glitter is fine, my dear friend. It’s fine seeing your friends, especially the ones on Twitter and Facebook, get richer faster from the stocks they own that you don’t.

If you have been in the stock market for long, you may have witnessed people who had never invested before piling into stocks, unknown and unworthy, just out of the fear of missing out.

If yes, you also know how that ended.