Investment Process

Part 2: How to avoid FOMO

Welcome,

In Part 1 of my “Investment Process” series, I wrote about Idea generation. How do I find new Investment Ideas & what tools I use for this process. If you have missed Part 1, you can have a look at this write-up first:

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In this part, I will describe how I filter all these idea s and how I try to avoid “FOMO”. As always when I write in the “Investment Strategy” section of this substack, it is a more personal write-up. So keep in mind that the process is not perfect, it just currently works for me. I’m constantly learning and thus my process also evolves.

Why avoid FOMO?

When I read a pitch of an interesting stock idea, it is often the case that I directly want to invest in it. Everything in the pitch sounds promising, the stock is undervalued, there is a near-term catalyst, the company is growing revenues & profits at a rapid pace and so on. What should go wrong? So better start a position before this fantastic opportunity gets the attention of other investors and the stock goes up before I’m in.

I think every investor knows this feeling. This phenomenon is called FOMO (fear of missing out) and it is a powerful force that influences your behavior. An investment decision shouldn’t be influenced by your emotions. But resisting this emotional urge is easier than you might think, especially in times of social media. Maybe you can resist in the first place, but then you see the first people on social media who are celebrating their huge wins in this stock and who are continuously posting about all the great aspects of the stock. This time you have missed this opportunity just because you haven’t invested directly and you swear to yourself that you won’t make this mistake again.

I was in this situation multiple times. Although an essential part of my investment strategy is that I do a thorough due diligence and take my time to think about the investment carefully I have often invested after reading a pitch and doing a short research. Especially in 2021 when making money in the stock market was so easy. A fast-growing “disruptive” company will do an IPO via SPAC? Just invest early before it gets a lot of attention and you will make a big profit in a very short time. That worked out well in 2021. So why bother with a time-consuming research process?

Well, in 2022 I realized why this is not an investment strategy that works for me. I had several companies in my portfolio where I only did a quick research and otherwise relied on a pitch from someone else. In 2022, the economic situation changed abruptly for many companies and instead of high growth, many reported declining sales and losses. At the same time, share prices fell.

The problem with “FOMO” investing and relying on someone else’s pitches is, that you are only prepared for the good times. As I already said, stock pitches often focus on the opportunities and not the risks. Which is totally fine, as you have to do your own work to find out what the risks and downsides of this investment could be. If you haven’t done this work, you will be alone with your questions and problems in the bad times. The one who pitched the stock will probably not be that vocal about his idea anymore. Instead, he maybe tells you that he already sold the stock weeks ago.

The stock continues to decline and you will ask yourself whether you should sell or buy more as it is maybe just a sell-off that is not directly related to the company’s operative performance. You will not be able to answer this question as you haven’t done your work. You invested with “FOMO” and just hoped for a quick gain. Your buying decision was heavily influenced by emotions and now your selling decision will also be determined by emotions as you don’t have the knowledge about the company to base it on facts. This is a great setup for a miserable performance.

In 2022 I had by far the worst performance in my portfolio since I started investing. One of my biggest learnings was that I invested in multiple companies with “FOMO” and that’s why I developed a simple framework that should prevent me from investing with “FOMO” again.

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The Quick-List

When a new investment idea gets my attention via a write-up or on social media, I do a quick check if it fits my investment style. I will give the write-up a read and check the fundamentals on TIKR. What is the company doing? Is it an interesting business I directly want to learn more about or is it working in an industry I don’t invest in? What’s the market cap? How have revenues, profits, margins & cashflow developed in the past and how are they expected to develop in the future? How’s the debt situation, valuation and so on. This quick check typically takes 2-3 minutes and I can even do it on my smartphone, so it’s really just a quick overview.

If the company ticks most of the boxes, this is typically the moment when “FOMO” kicks in. So this is the perfect moment to take a break when you want to avoid “FOMO”. And this is simply what I do. I note the company in my notes App on my smartphone. On this “Quick-List”, I simply note the company name or the ticker, not why it is interesting nor where I came across this idea.

It is important not to start directly with your research. When you start researching the company in-depth just after reading a positively written stock pitch you are still influenced by your positive “FOMO” emotions and it will be difficult to analyze the information on a rational basis. So I stop doing more research about this stock after adding it to my list. I never directly start with an in-depth analysis after reading a stock pitch.

As I come across more investment ideas than I have time to have a closer look at them, my “Quick-List” is quite long. When I have some free time to do some research, I just put out my phone and look at what’s at the top of my “Quick-List”. It has often been several weeks or months since I wrote the company on the list. And since I have a bad memory, I've usually forgotten where I came across the company or why I found it interesting. At this point, I can look at the company more closely without being influenced by an emotional bias.

Of course I miss out on some investment opportunities by waiting sometimes several months between the time of idea generation and the start of the research process but that is the price I am willing to pay so that I can make investment decisions on a rational basis. I'm sure many investors out there don't need to take this detour because they are always rational, but unfortunately, that doesn't apply to me.

I invest for the long term, preferably several years if everything fits and I am looking for multibaggers. What difference do a few weeks make? If the share rises by 10 or 20 % in the meantime, that is annoying, but if I believe that the share has the potential to multiply in the next few years and I have come to this judgment on a rational basis rather than under the influence of an emotional bias, then I prefer this approach and forego the 10 or 20 %. But of course that only applies to me and my investment approach. Everyone has to find their own investment approach that suits them. Accordingly, you also have to adapt the investment process to your individual needs. You need to find out which psychological biases influence your investment decisions and then find ways to work around them.

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This was Part 2 of “The Journey from idea generation to an invest”. If you also have problems with “FOMO”, you can try out my “Quick-List” approach. Let me know if it helps you. I would also be interested in the tricks that you use to avoid psychological biases :-)

In the next part, I will describe how I continue to filter the ideas from my “Quick-List” and how the in-depth research process typically looks like for me.

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