Investment Stories Are Like Social Media…Breeding Grounds for FOMO

Transcript

We all have that friend or group of friends who love to talk about investing. They’re always bringing up some investment they made a killing on or why you better get in on the latest investment craze before it’s too late. Look, I totally get it, because for many of us, it is almost impossible not to get sucked in to their hype or at least pay enough attention to see if it’s an investment worth considering because, god forbid, you miss out on a once-in-a-lifetime opportunity and they say “I told you so” a year or two down the road. So, are all of these stories total nonsense, or are your friends really great investors who merely have a day job to keep people from knowing they’re actually filthy rich?

Welcome to the first season of Invested Poorly: Sad Tales of FInancial Fails, a short-form podcast designed to help everyday investors make wiser investment decisions by learning what NOT to do with their money. Host Jeff Harrell shares timeless stories from his former life as a financial advisor, about the poor—and irrational—choices he witnessed investors make that disrupted their journey to financial independence, or FI. Your ability to recognize, and avoid, similar mistakes could make all the difference for you along your path to reach FI.

Check out the “Introduction” episode for more background on Jeff, why he created this podcast, and how it can guide you to becoming the hero of your own investing story. Now, on with show.

Over the two decades I spent as a financial advisor, there was rarely a week that would go by without a handful of clients calling me up, asking for my thoughts on some type of investment opportunity. My initial follow-up was always the same. Where did you hear about this? The response usually went something like this, I was talking to a friend of mine, or I read something on the internet. Rarely—no, actually I’m confident saying never—did I hear a client call me up and say something like they had just spent the last month analyzing companies left and right and after their in-depth analysis they stumbled across this diamond in the rough they think looks like a great investment opportunity. Never once!!

In fact, nearly everyone I have ever met who loves to talk about investing gets their ideas from somebody else, and it’s these stories that have created one of the greatest acronyms of all time:  FOMO, or the fear of missing out. That’s why we listen. Nobody wants to be the person who heard about an investment from a friend that went up a hundred-fold, but didn’t get in on it.

One of my favorite examples is the GameStop saga that happened in 2020, which some listeners might remember. For those of you not familiar with the story, basically a bunch of posters on Reddit were able to send the shares of a struggling video game company substantially higher by saturating the message boards with calls to buy, buy, buy. This started happening with countless other distressed companies, eventually sending the overall market into a complete frenzy. It was crazy, investors all over the world started acting totally irrational.

The best example I have of this, is one of my clients called me up in a total panic asking what he should do about this “GameStop thing” as he described it. You see, the reason he called was he had just spoken to his son in college who told him that everybody on campus was jumping on the GameStop bandwagon. So, he was calling me to find out if he should get in on it too.

I remember I could barely answer the question with a straight face. I mean, think about the thought process of this investment decision he was considering. This guy decided to call his financial advisor, to see if he should invest in a stock that he hasn’t done one shred of research on because his son calls him out of the blue and says everyone at his college was buying it. Now keep in mind, the stock has already more than tripled, or something like that, by the time he makes this phone call. I had been watching the news on these Reddit stocks and knew the hype was building, but this phone call left me beside myself. 

I remember after the call, I contacted one of my nephews, who was also in college at the time, to ask if he was hearing the buzz about GameStop around his campus. He couldn’t stop laughing and said...totally, everyone is talking about it. Fortunately, I had already schooled my nephew on the power of passive index investing, so he was able to “ignore the noise” as I like to say.

Now, for those of you who don’t know, although the hype definitely dragged on for many months and some people did make a lot of money during the frenzy, the vast majority of investors who got caught up in the Reddit message board stock hype got absolutely wiped out. So, please let this story serve as a reminder, because I promise you something similar to this GameStop saga will happen again and again and again.

Now, while this might have been a well-documented example of why following the herd typically doesn’t work out too well for most investors, I have even more evidence why the odds of success of any of these “pie in the sky” investments are low. Back in 2018, the Journal of Financial Economics published a paper titled “Do Stocks Outperform Treasury Bills?” If you like to nerd out on this stuff, it’s a fascinating read. I’ve included a link to the article in the description of this episode.

If you don’t have time to read the entire article, just skip to the article’s conclusion, which indicates only 43% of stocks outperformed one month Treasury bills. For those less savvy investors out there, the returns of one month Treasury bills are typically very close to those of money market funds, so that is what we are talking about here. Only 43% of stocks in their database from 1926 to 2016 performed better than a money market-like instrument. That’s crazy, don’t you think?

If you want to go a little further, they discovered that one-third of one percent—so that’s like 0.33%—of all the stocks in their database accounted for HALF of the entire stock market gains above one-month Treasury bills. And slightly more than 4%—yep, barely over 4%—of the stocks in their database accounted for ALL the gains above one-month Treasury bills. I just want to pause and give you a chance to digest these numbers. What this report suggests is that almost 96% of stocks, collectively, don’t outperform a money market-like instrument, and that you only have a 4% chance of selecting one of the really big winners in the stock market over the long haul. I don’t know what else to say.

So, the next time you hear about a can’t-miss investment or you feel the FOMO creeping in to chase the latest investing trend, just remember the odds are stacked heavily against you. Which isn’t to say you can’t beat the odds. But I’m betting against you, and I know I’ll win way more of those bets than I’ll lose.

I sure hope you enjoyed this episode of Invested Poorly and will be able to take something from it to improve your decision making as you navigate the twists and turns of your personal investing adventure. Be sure to check out my website at AreYouFI.com (that’s A R E Y O U F I dot com) where you can find resources and show notes with the charts and graphs I mention during the episodes. These are like little treasure maps that can help you choose more wisely along your quest to reach FI, or financial independence.

Never forget, in the short-term the stock market is unpredictable, and as my mischievous little nephew likes to say, “things just happen”! So focus on the long-term, by controlling your emotions, simplify your investments, and always… ignore the noise.

I’m your host, Jeff Harrell.  Thanks for listening.

Invested Poorly: Sad Tales of FInancial Fails was created for informational purposes only and should not be relied on for specific tax, legal, or investment advice. You should consider consulting a qualified professional to review your situation before engaging in any transactions. Investing involves risk, including loss of principal and past performance is no guarantee of future results. 

This podcast was produced by Ted Cragg. Learn more about creating podcast mini-series like this by visiting QuickEditPodcasts.com.