In the publication of what is your investment goal, I wrote about a stock that increased 100% in value in one day. It could play a trick with your mind because of confirmation bias. If you see it once, you will see it more often. This could lead to the fear that you’re missing out.
Opportunities every day on the stock market
When you start investing, the stock market can be overwhelming at first sight. Every day, there are opportunities because of news releases that affect companies positively or negatively. During pre-market, you can see which stocks are performing highlighted in green and which underperforming stocks in the red.
For example, company A is given FDA approval for their medicine and traders are buying the stock which leads to an increase of 80% in pre-market. It is normal to consider purchasing the stock and hope for a continued upward trajectory. However, it is difficult to conduct your research in this short-time span. For example, the four bullet points below.
- To know what their addressable market is and how it affects their target audience
- The history of the company and its pipeline
- How their financial figures compare with their peers.
- The market sentiment towards the company
You are flipping a coin while betting with the market and chasing a stock. You can get lucky and make a profit or be unlucky and lose money. The problem with luck in the stock market is not that you can’t have it but that you shouldn’t count on it.
Fear of missing out (FOMO)
Andrew K. Pryzbylski, Kou Murayama, Cody R. DeHaan, and Valerie Gladwell conducted research on the fear of missing out. Social media has made it possible to know about a range of activities and news from all over the world. So many opportunities that are available but a scarcity of time which can lead to a feeling of dissatisfaction.
The fear of missing out could be a party, concert of your favorite band nearby or an investment. When you decide to not buy a stock and afterward you see that it doubled or tripled in value, you could have this exact feeling. However, this could also lead to hindsight bias where we have all the answers and know exactly when it was the best opportunity to buy and to sell. Timing the market is proven to be almost impossible, or you are a time traveler. Personally, I like to turn it around when missing out by seeing it as progress to have noticed a company that increased significantly in value.
You can also “chase” a stock and from that moment it decreases in value. This is the opposite of the fear of missing out. What will you do if this happens? Because the reason for buying was to make a quick profit. Will you take your loss or own a stock that you did not research properly for a longer period? When you decide on the latter, there are two things that can happen. The stock recovers or will go even lower. However, the uncertainty of chasing a stock remains. By conducting your research on companies that have caught your eye and major events coming up, you will feel more confident and have peace of mind about your investment(s).
Have a plan
There are many stocks that are a click away from owning a share but you also have to think about the following things.
I recommend making a plan before investing that suits your personal situation and prepare yourself. This will help you control your impulses when your investments are going very well or bad. Buying a stock based solely on news can be lucrative but can also have a high cost. It depends on your risk aversion how you deal with it.
Therefore, I like to invest for a longer period that allows me to research and prepare myself properly. From the moment you invest what exactly happens with your money is partly out of your hands. You want to give yourself a better chance to succeed by having guidelines and exercising control. When you prepare yourself and not pass up on opportunities that you can evaluate, you will create your own luck.
“By failing to prepare, you are preparing to fail.”
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.