There are two types of kids in high school – the ones who always have to be around the action and those who don’t care what others think.
The first group doesn’t want to be left or miss out on what everyone else is doing, even to their detriment. They can’t miss out on the parties even if there’s the risk of getting in trouble with parents or, worse, getting busted by the cops. The risks don’t stop them, though, as the fear of missing out (FOMO) outweighs any potential risks.
Last week, the party was over Facebook when its stock set the record for the largest one-day value drop in stock market history – tumbling $232 billion in value last Thursday (February 3rd). The party’s over for the stock market as a whole in 2022 after a record-setting 2021, down over 850 points since the beginning of the year.
The stock market is in correction territory after the stimulus-fueled feeding frenzy of the past two years. Newbie investors suffering from FOMO jumped on the stock market bandwagon armed with stimulus cash and free trading on Robinhood.
The stock market is suffering the hangover of overvaluation as investors drove the prices of stocks well beyond their underlying values. Despite floundering revenues, investors traded on internet hype and social media to meme stocks like Gamestop (GME) and AMC Theaters (AMC).
The stock market is like high school with investors rushing in and out of the latest and greatest party – hoarding and dumping stocks at will. Herd behavior has not only become more prominent in recent years, but it has also become more frequent. Case in point: the seven biggest drops in stock market history have all occurred in the last two years.
The average retail investor can’t help going along with the crowds. Still, it’s not an effective investment strategy – evidenced by the average annual return of the typical retail investor failing to keep pace with inflation.
These days, the stock market isn’t the only party investors are flocking to. Investors flooded the crypto markets in droves in the past two years. The result? Since hitting a record high last November, massive losses as Bitcoin has shed nearly a third of its value.
The stock market and Bitcoin experienced minor rebounds this past week but do not be fooled. That’s most likely a product of tax refunds and not a shift in economic conditions.
While everyone wants to be the cool kid and go along with the stock and crypto crowds, there’s a crowd of smart kids that ignore all the noise. They don’t care what others think, and things have always worked out for them. These smart investors don’t chase FOMO; they chase ROI.
The whole concept of timing and trying to outsmart the market is madness in the eyes of these investors. They prefer predictability and consistency. They understand that all assets suffer from dips from time to time, but they choose the assets that experience the less severe and less frequent dips.
Instead of meme stocks and crypto, smart investors pursue the following objectives:
- Tangible assets.
- Cash flow.
- Historical appreciation.
- Tax benefits.
- Non-correlation to the broader markets.
- Investing in demand for inflation protection.
- Forced appreciation opportunities.
Smart investors avoid disaster by avoiding FOMO. What type of investor are you?
When investing, ask yourself the following questions:
- Are my prospects for profitability dependent on quantifiable factors, or are they dependent on public sentiment?
- Does the asset generate income?
- Is the income protected from downturns?
- Does the demand for the asset correlate with inflation? In other words, is the asset something consumers will always need with prices rising with rising prices in general?
- Does the asset offer tax benefits to pad profits through tax savings?