Mass FOMO: A Probable Reason For NEPSE’s New Records

Article by Sambhav Bhurtel

FOMO stands for Fear of Missing Out. If the research works are to be believed, most of the people in the stock market possess this fear, especially if the market is volatile and increasing. Sounds familiar? Nepal Stock Exchange right now clicks every requirement to cultivate FOMO in the investors' minds. More so, with ever-increasing prices of stocks in previously ‘cheaper’ sectors, people are tempted to invest in the stock market now more than ever.

What’s going on in Social Media?

I don’t use social media very often. However, a few days ago, I spent some time on Facebook just to see a ton of rags to riches stories, and everyone talking about NEPSE. There was one phrase I saw most of the time and possibly you all are also familiar with. “BOOM BOOM” is everywhere. If we are to compare this to the recent squeeze of GameStop, “BOOM BOOM” sounds much like the “GameStop to the moon” phrase used by Redditors at WallStreetBets. The same is the story with thumbnails on YouTube videos about the Nepalese Stock Market. Everyone wants to see the market skyrocket. Likewise, many people most probably have the perception that whatever they think about the future of a stock or what they are told about it is all true. And guess what? The market initially proves them and all the boomers in social media correct for days or even weeks. As a result, more people start to succumb to FOMO and start pouring in cash.

What’s up with this hype about NEPSE?

First of all, the stock market is perceived as a source of free money by a lot of new investors. The reason behind this perception is how people are first introduced to the stock market. People are generally attracted to the stock market just to earn more than fixed deposits from their money. The stock market used to be discussed in tea-table conversations between friends and colleagues, in broker offices, and in financial forums in social media. Nonetheless, the stock market has found itself in everyone’s social media timeline, family group chats, and whatnot. Basically, everywhere. And let me tell you, those sources of introduction to the stock market are not very good. The market demands knowledge, patience, risk-return relationship, loss minimization, diversification, and a lot more to make a profit and not lose much money. This knowledge isn’t available from family chat groups or social media posts which increases the risk for the new investors by a huge margin.

The Trap

If we look at this stock market from an experienced investor’s perspective, now is just another bullish trend in the cycle of bulls and bears. Moreover, with the influx of millions of new cash in the market breaking records every other day, this is a huge money-making opportunity. Additionally, the herd mentality of many new investors in Nepal (also all around the world) enables the big experienced investors to easily take the market up to great heights. All the hype around the stock market just fuels the hike in prices. This hike helps the older investors bag huge amounts of profit. There is one inevitable reality that every investor needs to know. The price of any stock can’t go up forever given the fundamentals of most companies listed in NEPSE. Just like the price goes up, it falls as well. However, sometime before this fall arrives, magically, most of the huge investors will have already sold their holdings with profit in both their hands. Who loses the most? The one who enters the market last, which in most cases, are unfortunately the individual investors and beginners.

Why do people risk their hard-earned money?

Everyone in the world needs money. Actually, a lot of it to live a proper life. Especially, in a country like ours where the majority of the population has difficulty in making ends meet, some extra money is always helpful to manage finances. In everyone’s circle, people do different things to add those few bucks to their savings. In this process, just one person in a circle who made some money in a bullish market is enough to inspire the rest of the lot to invest. And, if the bullish run is long enough, most of the people in the circle will have made some profit. Once again, a huge trigger of FOMO for those who haven’t entered the market yet. Adding to that, the circle of people has grown exponentially thanks to social media and a lot of chat groups. As a result, a single person with a good social media activity can motivate a lot more to enter the market. There is a huge psychological trigger to do something more if it provides you with rewards. And thus, people can't help but invest in the market even if the risks are too high since the fear of missing out overpowers the fear of losing money. We’ve all had that moment of “I should’ve invested more on that particular stock!”, haven’t we? Add that to the list as well.

Why is FOMO even a reason for NEPSE’s rise?

Simple. Higher the money influx, the higher the demand. A rise in demand results in a rise in prices. Scaling that up by a significant level, we can find the correlation between mass FOMO and NEPSE’s rise. To statisticians reading this, I haven’t done any statistical research to establish this correlation. This is simply my conscience, perspective, and connecting simple dots. Market’s rise and fear of missing out go side by side. As the market grows, the fear grows. However, if the market falls, FOMO disappears out of nowhere inviting another FO. We’ll look at that fear below.

What’s in store after FOMO?

FOMO encourages an individual to buy a stock, that too at a high price. Should the prices start to plummet, even by a bit, a new fear arises. Fear of Being Invested (FOBI) is the fear investors have that the market will crash and so will their holdings. This fear highly encourages investors to not hold onto their stocks even if a small dip occurs. As a result, people opt to lose a few bucks in a fear of something more catastrophic. Can you connect the dots here? These different fears control people’s mindsets, making them buy high and sell low. This isn’t necessarily the case in most investors, but it holds true for a significant bit. Except for one condition where we are in a stock market utopia where the market never falls, these fears wouldn’t be of any concern. Sadly, the reality is a bit different from that. So, we should always take into consideration how we might act given different scenarios.

Some cautionary suggestions

1) Making a proper strategy: This is the best thing any investor can do to maximize profit in the stock market. Proper analysis of stock and adequate reasoning before choosing a stock can result in good returns. Also, the holding time, target profit, stop loss thresholds can be of huge help. A good strategy with an even better implementation is the key to booking profit. Here’s something I keep on saying, “Create an investment strategy like a human, implement it like a robot.” Not sticking to the strategy and letting our emotions or fear overpower us in the market are big red flags.

2) High greed, impatience, indecision, lack of confidence, and overconfidence are the biggest factors behind people losing in the market. It's up to us to handle those emotions and actions.

3) Looking at the market depth too much: Apart from the times where we have to decide on proper buying and selling rates for stocks, too much market depth can be harmful. Numbers are a huge trigger for our different subconscious decisions.

4) Long-term investment: This had to be here one way or another. Yes, I know that long-term investment isn’t interesting enough. In fact, too boring as compared to those day in day out profits. Nevertheless, history has always favored long-termers big time. It is always a good practice to keep a percentage of investment for long-term holding. However, it is better to buy in a not-so-bullish or a bearish market.

5) The portfolio: The stock portfolio isn’t the balance you have in your bank account. It is just an indicator of how much you’d get if you sold all the stocks right away. Just a number that can rise or fall significantly any second. Hasty decisions made just by looking at the portfolio numbers can be harmful.

6) Rumors: There’s a good reason to not believe in any of them. Rather, keeping ourselves informed by reading and listening to authentic sources can help us make good investment decisions.

7) Diversify: Diversification is always stressed when people talk about reducing loss. In this bullish market too, it has some significance. Looking at the current trends, entire sectors are behaving as a single stock. It can be a good idea to diversify not just within a sector, but also among the sectors. That way, even if one sector takes a hit, the losses won’t be that significant.

8) Buy the dip: Lastly, I’d like to end with Warren Buffet’s words, “Be greedy when others are fearful, and be fearful when others are greedy.” This works in stock markets, however, in a crazy bull run like the one we’re currently facing, waiting for a bearish cycle can take a long time as well. So, to minimize losses, it can be handy to buy a good stock when there’s a slight dip in the market and book profits once the prices rise. This will surely reduce the chances of loss. However, for extremely volatile stocks, those dips could be huge pitfalls. So, it is always good to have some knowledge of what we’re stepping at.

Article by Sambhav Bhurtel

Editor's note: In recent times, the number of article submissions we receive has gone up just like the hype in the NEPSE index. However, we reject a huge majority of them because the articles revolve around a general theme and fail to provide a concrete argument. Consider going through our Submissions Guide. Try writing on a topic that provides value to the reader, or a distinct opinion that the reader would be interested in, and hopefully benefit from. The following article can be taken as a good example of what we mean by content that is well-formulated, well-written, and well-expressed.