Why you should avoid FOMO investing
It wasn’t that long ago that ‘FOMO’ was a new word that no one had ever heard of.
Standing for Fear Of Missing Out, it was initially used by millennials who wished they were out partying with friends rather than studying or at work; or that they were travelling; or at a gig by their favourite band.
However, these days it is almost exclusively used (in Australia anyway) to describe would-be investors trying to get into a hot market.
These hot markets are usually real estate or, these days, Bitcoin, where FOMO might sound something like: “When you bought your PlayStation 10 years ago, if you’d bought Bitcoin instead you’d have $3 million now…FOMO much”.
No matter what the asset class, FOMO can cause you to throw money at investments that are overvalued, simply because you’re worried the gravy train has left the station for good and the profits will only rise from here so, better late than never, right?
FOMO is as least as old as Warren Buffett
While the term FOMO is new, the rash investor behaviour that it describes is anything but. Just ask the man dubbed the world’s greatest investor, Warren Buffett, who has been observing herd mentality forever and a day and betting against it to make billions of dollars. When the value of an investment skyrockets, the herd is forever rushing to buy. But when it starts to fall, people want to sell, sell, sell as panic takes hold and they want to get out of an investment before it loses them anymore money.
Buffett makes his investments based on his own criteria for what makes a good asset and then makes sure to buy when the stock is at good value, not when it is overinflated. When there is a lull and people sell it off in a hurry causing the price to fall, Buffett uses the opportunity to invest more.
Real estate cycles
Right now, FOMO is alive and kicking in multiple real estate markets around Australia. Every week we’re hearing about really ordinary houses selling for millions in less than desirable suburbs. House prices seem to be going up and up so we’d better invest now or we’ll be left behind for good, right?
Wrong. While property values have indeed gone steadily up in Australia over the decades, and will continue to do so, real estate moves in cycles. While each growth cycle may take median values to a new level, there are different levels of competition at different stages of the cycle.
Let’s take a look at recent property booms. Sydney is the best example. It boomed in 2001 to 2003, then the property market went backwards for a couple of years before flattening out ahead of the GFC. Apart from a little stimulus boost here and there, the Sydney property market didn’t have its next growth cycle until 2013 to 2018. So there were roughly 10 years where the property market went nowhere. Know anyone who bought in 2005? Or 2012? There were hardly any buyers trying to get property then, but the ones that did have now made a mountain of capital gain.
If you had bought at the top of the property market in 2003 when everyone was trying to buy, you would have paid an inflated price, then experienced a short term loss, then a decade-long wait to experience any more growth. And that’s if you held the property. Because if FOMO caused you to buy, it may have also caused you to sell when the property market fell. Say you did hold the property, by 2021, you would have made plenty of value gain, but it would have taken much more patience and faith in the investment than if you had timed the market properly and bought in 2005 or 2012.
Some things never change
Think about the first word in the FOMO acronym. It’s fear. Being in a state of fear is never ideal for making sound decisions. Especially when it comes to finance.
Property purchases should never be made for reasons of emotion like fear or jealousy. They should be made because they are practically sound and they tick your boxes.
Just like Warren Buffett’s investment criteria for company stock, b Invested founder Nathan Birch has his own set of fundamentals for investing in property. Any properties purchased should be below market value; with an upside for capital growth and a strong cashflow (positively geared with good rental return).
And remember, property is a long game. It is so long, it’s like the test cricket of investment classes.
It’s all about timing the market and time in the market. Get in below value and hold for as many property cycles as you can. The values and rents will keep rising over time, while your debt reduces or stays the same.