FOMO & False Starts

The markets go up too quickly when people are least prepared for it. That setting is perfect for us to get that fear of missing out. We call it the FOMO feeling. But the markets also have an equally strong way of reversing direction. Either in stock price or in a broader market context.

What we saw last week in the shares of HDFC bank, was a classic example of FOMO getting built up one day, and the entire thing reversing the next day. Such situations teach us how we must manage our emotions. They help us practice how to avoid getting the FOMO feeling. They also give us an opportunity to practice the contrarian way when valuations come back in our favour. If it can happen in a market-leading stock like HDFC Bank, it can very well happen in every other stock. It could even be a market-wide phenomenon sometimes, especially when global sentiment reverses after local sentiment strengthens.

The past few weeks have seen the local sentiments strengthen significantly. This has been backed by FII flows. We are heading into a fortnight that leads us into the monsoon’s arrival. This lead-up is never easy to predict. Investors have gone wrong multiple times during this lead-up phase often getting misled by the buoyancy in sentiment. We have had situations where investors have tanked up in May on the back of buoyant market sentiment, only to see the market tank down in June. When you look back and think about what made investors do this, you will clearly see the FOMO factor as the active culprit. This is a phase when the investor must actively control the fear of missing out feeling.

Controlling the FOMO feeling will ensure that your investment actions will be rational and conservative. While completely avoiding investing is not an option, an investor still has the choice of undertaking only those investment actions that carry strong merit. If an investor practices, prepares and participates in investment ideas only where he sees very strong merit, he will completely avoid getting misled by market sentiment and break free from the FOMO factor.

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