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Undermining the Fear of Missing Out: Research-Based Investing

Undermining the Fear of Missing Out: Research-Based Investing

Electronic Cocaine

Perhaps this has happened to you…

Fomo

Another busy morning, and it’s the usual scramble to get to work. So far you’ve avoided taking a look.

At your cubicle, you take a deep breath and click the link. It’s up again, this time a lot.

Without you.

 

You sit there wondering why you didn’t do it. Why didn’t you buy it? You knew it was going up. Images flash before your eyes— the holiday, the car, six months pay. All you had to do was send the cash to your broker and click the link.

You sent the cash, but something held you back from taking action. Maybe it was the unexpected bill? Maybe.

You walk to the coffee machine. A short-term treat to help get you through the day. On the way you look around, faces you know. Not friends, but people you spend almost all your time with.

“Next time it goes down, I’ll buy,” you say to yourself as you settle in for the day. “Next time.”

Twenty-four hours later you’re hovering over the link. Click.

It’s up again. And it hurts.

FOMO has you.

Read on…


Chasing The Dragon

You experience a loss 250% more intensely than a gain. It’s one of your built-in biases.

Lean in, because here’s the kicker — the loss does not have to be real. It can be in your mind, yet just as powerful.

FOMO, the Fear of Missing Out, is one of the causes of trends.

It hurts when your idea is wildly successful without you. And now you know why.

In the end, you’ve had enough. You’ve got to get in. You can’t stand being left behind.

The fear of being left behind or abandoned is another built-in bias working in the background. It affects us all.

FOMO, driven by the 250% intensity spike of a loss, real or otherwise, and combined with abandonment, is an emotional cocktail that causes an otherwise intelligent person to act impulsively.

As prices move up without you, you’ll do anything to end the pain. Like a crack addict looking for an axe, your brain short circuits. And you’re in.

It’s easy to think you’re alone. But you’re not.

Unfortunately, this behaviour is well known by the professionals. And they exploit these weaknesses in all liquid markets, and on all time-frames.

Jacket On — Jacket Off

In the Karate Kid, Dre Parker moves to China and quickly finds himself an outsider. Dre is picked on by a group of kids well trained in karate. Mr. Han, an unassuming maintenance man, rescues Dre from a severe beating.

Mr. Han has a secret. He too is an expert in karate and agrees to help train Dre.

On the first day, an excited Dre turns up for his first lesson. He can’t wait to learn all the cool stuff like kicks and punches.

Instead, Mr. Han, has Dre take off his jacket and put it on a hook. Again and again, day after day.

Jacket On

Brazil. In 2007 Brazil won the bid to host the World Cup. The country was doing well economically, thanks to deals with China and high commodity prices.

In 2011, the only way was up for Brazil, and all sectors were doing well. The Brazilian Real was strong against the US dollar. Everything looked good, and the only way was up, but when the only way is up, the opposite is at highest risk of being true.

 BRLUSD UP

BRLUSD UP

In 2014 Brazil hosted the World Cup, but by then the cracks had started to appear.

A year later, in 2015, operation Car Wash uncovered the biggest corruption scandal in the history of Brazil implicating corporate giant Petrobras and many other international companies. Politicians, billionaires, and entrepreneurs trapped in a spiders web of deception, including bribery, money laundering, and fraud, go to jail and swap their extravagant lifestyles to live cheek by jowl in a prison cell.

Zika. In May 2015 Brazil registered its first case of the Zika virus, and this could not have come at a worse time. People stayed away.

By early 2016 the country had plunged into recession. Shares in Petrobras the Brazilian oil company, mostly owned by the government, had lost 90% of its value and the Brazilian Real was down 43% against the US dollar.

 BRLUSD DOWN

BRLUSD DOWN

The output of Brazil falls 25%, and government debt rises by 50%. Suddenly, just like that, Brazil finds itself deep in recession.

In 2016 the only way was down for Brazil. High debt, low commodity prices, corruption scandals.

When the only way is down. The only way is up.

Why are we talking about Brazil on a cryptocurrency site? How can this possibly be relevant?

Patience.

Jacket Off

The process of accumulation and distribution happens in all traded markets. It shows up in economics, it shows up in real estate, it shows up in politics, and it shows up in cryptocurrencies too.

Brazil 2011: Good news everywhere. Brazil was next to host the World Cup. Income was excellent, thanks to high commodity prices, and the country had very little debt. The only way was up.

 BOV UP 2011

BOV UP 2011

You can guess what happened next.

 BOV DOWN 2011

BOV DOWN 2011

Brazil 2016: Bad news everywhere. Corruption, Zika, debt, and inflation. The only way was down.

 BOV UP 2016

BOV UP 2016

The majority of people were buying Brazil in 2011 and selling in 2016. And, as we’ve discussed in Puppet on a String and The Hidden Hand, acting as part of the crowd may not be in your best interest.

Just like Dre Parker putting on and taking off his jacket thousands of times, if you observe the process of how prices move, then one day, everything will come together.

You’ll start to believe, and if you believe, you begin to trust.

This process happens in all highly traded markets. Anywhere a crowd of people congregates to conduct trade. From cryptocurrencies to a racetrack bookie and all markets in between, hidden in plain sight for all to see.

Three For A Pound

In The Hidden Hand, we discussed how prices move through cycles of accumulation, and how the pros (whales) build a position during the accumulation process. We talked about how prices move, and how they’re based on supply and demand.

How prices move from one level to another, without having to trade at any price in between, is important. The interaction between buyers on the bid and sellers on the offer is the key to understanding how prices trend.

Once the whales build a position, they hold the majority of the inventory. By maintaining high levels of stock, they can place buy orders to drive prices up. If there are no sellers above the buy price, the bids will outnumber the offers and prices will rise.

And when prices break out of an accumulation base, they start to trend. This is when the media coverage begins. This is when the public start to buy. This is when prices trend.

It’s funny — most people intuitively understand this when it comes to everyday life.

Let’s say you own a market stall and you trade strawberries.

Early in the morning, you go to your supplier, and you pay the wholesale prices for your goods.

You get to market, and you set out your stall. That’s the supply.

Then you wait for the crowds to turn up.

At first, business is slow, but you don’t worry about it because you’ve got all day to clear your inventory.

By lunchtime you’ve only sold half of what you expected, so you get off your chair and get active.

“Hello Madam, three for a pound?”

You drop your prices to attract demand.

Better to breakeven on this day or take a small loss. You can’t win them all.

Almost everyone understands this when it comes to strawberries. But turn the strawberries into shares of stock, or crypto coins and tokens, and the opposite happens.

People, in general, become confused and have no idea what’s going on.

If the market stall is going to close in 10 minutes and there are kilos of strawberries still laid out, there’s no way you’d pay the market price. You’d either ask for a discount or the trader will offer you one, or both.

Metamosphosise the strawberries into real estate, Apple shares, Bitcoin or Ethereum, and all the intuition disappears.

Why does this happen?

Why do otherwise well educated and highly intelligent people behave like this?

Would you second guess yourself in the last few minutes of the day in front of a well-stocked market stall? You’d know what to do instinctively, and you’d nail a bargain, yet why do most people ignore their instinct and intuition when bidding for an asset like cryptocurrencies or stocks?

Greater Fool

As prices trend higher more and more people start watching, most don’t do anything — at least not straight away. Influenced by their subconscious biases they wait. They wait for the price to drop before they buy.

In a strong trend, prices can go up a lot further than most could ever think possible. Bitcoin between September and December 2017 is a great example.

Caveat - Understand What You Are Looking At

Most people use charts to gauge trends, and this is ok as long you understand what you’re looking at. Most don’t.

Take streaming giant Netflix.

If you look back at a chart of Netflix you’ll see prices moved from a low of $2.56 in November 2008 to a high of $43 in July 2011, Netflix had a 1579% increase in prices.

In January 2010 Netflix started its trend phase. The trend drove prices from $7 to $43, a 514% increase.

Except they didn’t. The chart is lying to you.

When you look at charts, especially online, most providers show the charts back-adjusted for either share splits or dividends or both.

The actual, real, unadjusted Netflix prices were around $22 in November 2008 to a high of $270 in July 2011, a 1,078% increase.

Here’s a standard arithmetic scale of Netflix between 2008 and 2018.

 NFLX A

NFLX A

Here’s the same data using a log scale.

 NFLX LOG

NFLX LOG

Here’s the actual real and tradable data with real-time prices.

 NFLX REAL

NFLX REAL

See the difference?

It’s crucial because this needs to be understood when looking at charts for the behaviour patterns of accumulation and distribution.

Great Fool — Continued

Prices can go up on less turnover of volume because there are more willing buyers than willing sellers and not because there’s thousands or millions of buyers. It’s a ratio, not an absolute number.

And when prices start trending, more and more people start watching. As they wait, their built-in natural biases kick in. Like electronic cocaine.

The more they wait, they become more emotionally engaged and play vivid images in their mind, seeing pictures of what could have been. This is FOMO, fear of missing out, and as we’ve seen, it’s painful. 250% more painful than taking a profit.

How does an uptrend end?

There are subtle differences between how down moves panic people out and up moves panic people in. The latter is not quite as urgent. But it’s the same effect.

You are looking for an emotion bar to the upside.

The subtle difference is the emotion bar can occur on either a high volume of turnover or very low volume.

This is Ethereum making a high.

 ETHUSD HIGH

ETHUSD HIGH

The price moves up to new highs and closes at around 50% of the range on 57% of average turnover. Where are the buyers? Where is the urgency to get in at all costs?

Mark the high and low prices of the emotion bar day and this becomes a zone that has a high likelihood of being tested. If the test fails, you can expect lower prices as sellers have to drop their offers to get out.

The process of putting in an emotion bar high and testing is called distribution.

The Egg Of Columbus

In Electronic Cocaine, The Hidden Hand, and Puppet on a String you’ve seen how prices really move. You’ve seen how prices transition between down moves, bases, and up trends. You’ve seen how trends end, and how the cycle begins again — with a failed test at a distribution zone.

It works like this…

Down Trend — Emotion Bar — Accumulation — Base — Break out — Up Trend — Emotion Bar — Distribution — Break down — Down Trend

All hidden in plain sight.

We all have a potent concoction of biases influencing our behaviour.

The antidote is to be aware they exist.

Columbus discovered the Americas and went on the fifteenth-century version of the after-dinner circuit. The years went by, and one night a heckler interrupted Columbus, mocking him for his achievements.

“Anyone could have done it,” the heckler shouted. “You’re nothing special.”

Columbus reached for a hard-boiled egg on the table, “Here is an egg learned youth. How can you get it to stand without touching it?”

The young man tried in vain to get the egg to stand.

Columbus took a spoon and hit the egg on one end forming a base. He placed the egg upright on the table, and the crowd went wild.

Anything is easy, once you are shown.

Like Columbus’ egg, positioning in cryptocurrency markets is simple but not easy.

 

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