The most dangerous time to invest is when the fear of missing out (FOMO) is greater than the fear of loss.
It’s an odd characteristic, really.
Folks will tolerate losses as long as everyone around them is losing money, too. But, if we’re on the sidelines while everyone else is making money, well, that’s unacceptable.
So, we set aside our discipline. We ignore our risk parameters.
And we chase investments higher into unfavorable conditions – even though we know better.
Then we lose money along with everyone else.
This cycle plays out all the time.
Think back to the cryptocurrency market in 2021. Bitcoin was trading above $60,000. All sorts of obscure, functionless, crypto coins were being created out of thin air. Then they’d double or triple in value in a matter of days.
Folks who had no understanding of the crypto market – no idea of what it’s for or how it’s used – threw their hard-earned money into the scheme. They didn’t care about the risk of loss.
All they knew was their next-door-neighbor’s teenage son, their babysitter, and the check-out lady at the local Piggly Wiggly were making money in crypto. And, the fear-of-missing-out was too painful to ignore.
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In hindsight, it’s easy to see that 2021 was a peak-FOMO moment for crypto. It was also a peak-FOMO moment for non-fungible-tokens (NFTs), ICOs, Bored-Apes, and digital images of rocks.
We won’t know for sure for several months, but it sure feels as though we’re reaching a peak-FOMO moment for the stock market.
The S&P 500 currently trades for about 20x 2024 earnings estimates. That means the earnings yield for the S&P 500 is about 5%.
The current yield on a three-month Treasury bill is 5.5% (and likely to go higher following the FOMC meeting next Wednesday).
In other words, investors can buy the S&P 500 – and assume the risk that goes along with it – and expect to earn about 5% over time. Or, they can buy a “risk-free” U.S. T-bill and earn 5.5%.
Yet, investors are rushing to buy stocks.
Why? Because the fear of missing out is greater than the fear of loss.
This is a dangerous time to be putting fresh money into the stock market.
Best regards and good trading,
Jeff Clark
READER MAILBAG
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