Investor FOMO Could Cost You a Fortune. Just Ask Sir Isaac Newton.
What the renowned scientist’s 18th-century market misadventures can teach us about the crypto markets today
When you think of Sir Isaac Newton, what comes to mind? For me, it’s an image of him sitting under an apple tree, being hit in the head by falling fruit and suddenly coming up with the law of gravity. (I did some fact-checking and found that the concept of gravitation did come to Newton’s mind when apples occasionally fell as he sat under an apple tree, while in a contemplative mood, and that famous apple tree still grows at his childhood home, Woolsthrope Manor near Grantham, England — but there’s no evidence suggesting an apple actually hit him on the head!) Less known, Newton was also an avid investor. And as brilliant a person that he was, he suffered from a terrible investing ailment that strikes many today: FOMO.
Newton had an incredible career, as a renowned mathematician, physicist, and astronomer who developed the laws of motion, including his third law stating that for every action there is an equal and opposite reaction. He also dabbled in alchemy. After he retired from his academic post at Cambridge University, he was Master of the Royal Mint. Yet his FOMO affliction, the fear of missing out, cost him dearly in 1720 — estimates range from a loss of $3 million to $20 million in equivalent money today (depending on cost of living adjustments). We can learn important lessons if we better understand what FOMO is, and Newton’s FOMO misadventures. I’ll provide some tips on how you can avoid FOMO.
What is FOMO?
In a 2013 study published in Computers in Human Behavior billed as the first empirically and theoretically grounded examination of the FOMO phenomenon, FOMO is defined as “a pervasive apprehension that others might be having rewarding experiences from which one is absent.” The researchers looked at FOMO in the context of social media, which provides a multitude of interactive opportunities, but too many that can be pursued. They conducted surveys and found that those with higher FOMO scores tended to also have lower levels of satisfaction of needs for competence, autonomy, and relatedness, and tended to have higher levels of social media engagement.
The term FOMO was added to Oxford Dictionaries Online in 2013. It is often attributed to author Patrick J. McGiness who popularized the term in an op-ed he wrote in 2004 while attending Harvard Business School, describing the feelings of an HBS student who accepts numerous social invitations to the point of exhaustion for fear of missing out on networking opportunities. But the term goes back further, at least to marketing researcher Dan Herman, who used the term in a publication in 2000 to describe consumers who desired uncompromising combinations of products such as “2-in-1” and “3-in-1” offerings, with the fear of missing out on one type of attribute in one product compared with a different attribute in a different product.
We can also experience FOMO in investing. Suppose you bought an asset — perhaps a stock or cryptocurrency — and the price goes up, so you decide to sell it. You’d think you might be happy because you just made a profit. But your feelings often depend on what happens next in terms of the price of the asset you just sold. You may decide to continue to track it. If the price goes down, you’ll attribute your good fortune to immaculate timing and knowing when to sell. But what if the price continues to rise? You’ll probably think about all of the profits you are missing out on, and fear that you’re missing the party that’s still going on. That’s precisely the situation in which Newton found himself.
Newton and South Sea Stock
Just because we give something a new catchy name like FOMO, doesn’t mean it’s a new phenomenon. Let’s see what was happening with Newton in the 18th century. New research has helped paint a picture of Newton, the investor. He was a wealthy, active investor, and he also acted as one of the executors of the estate of Thomas Hall. Hall was a civil servant who worked with Newton on Britain’s great recoinage in the 1690s to replace hammered silver coins. He was a long-term investor who didn’t make many portfolio changes, except in 1720, now known as the Bubble year. Both Newton and the estate were invested in South Sea stock. As I mentioned in a previous article, the South Sea company was a joint-stock company incorporated in 1711 by an act of Britain’s Parliament to reduce the cost of the national debt in return for providing monopolistic trade in and around South America. Despite dubious prospects of profitability, the stock rose from £128 per unit or share in January 1720 to almost £1,000 in August of that year.
For a buy-and-hold investor, anyone who purchased South Sea stock as late as mid-1719 and did nothing for the next four years would have experienced a 50 percent capital gain in addition to dividends. During 1720, there were opportunities to buy the stock in the market, as well as during four separate subscriptions — what we would now call seasoned equity offerings. Records indicate Newton owned thousands of shares as early as 1712, and increased his holding several times over the next few years.
Bursting of the Bubble
At the start of 1720, Newton apparently held about 10,000 shares of South Sea stock worth about £13,000. By mid-1721, he owned 16,300 shares. Around April 1720, as the chart below shows, he liquidated most of his South Sea holdings, for a profit of £20,000. In a matter of weeks, the stock price doubled, and feeling a sense of FOMO, he took all of his profits, cashed out other investments, and repurchased South Sea stock at double the price. He continued to buy, both for himself and Hall’s estate, well past the peak stock price. The stock ended the year at a similar price to where it began.
According to Andrew Odlyzko, the researcher who uncovered new information about Newton and the South Sea stock, the most interesting transactions shown on the chart occurred in the middle of September when the stock was in a free fall. Odlyzko concluded that buyers such as Newton “could only have been motivated by deep conviction that the market’s change of heart about the South Sea Company was just a temporary irrational panic [emphasis added], and there was real value in the venture.” Newton had apparently become a true believer, and he was all-in. The in-then-out-then-in-again misadventure apparently cost Newton £13,000.
What was Newton’s reflection on this roller-coaster ride? He is famously purported to have said, “I can calculate the motion of heavenly bodies, but not the madness of people” (although the reference to heavenly bodies was probably an embellishment of his reflection). The South Sea debacle was said to have haunted Newton for the rest of his life and he didn’t want to talk about it.
FOMO and Cryptocurrencies: The Dogecoin Example
Which brings us back to today, and where we see that, like in 1720, conditions are ripe for FOMO investing. We saw that with GameStop, and recently with cryptocurrencies — dramatic increases in the price of assets over a short period of time. As an example, let’s take a look at dogecoin, in the chart below, which shows its price since April.
You probably know at least some of the Dogecoin story. It was started in 2013 by Jackson Palmer and Billy Markus as a parody of bitcoin, with a Shiba Inu dog as its mascot. It was designed with no purpose except to get some laughs. It rose to prominence in part because of tweets by Elon Musk and other celebrities.
At the start of 2021, it was trading at less than a cent. What amazed me about the chart is the striking similarity to the price of South Sea stock in 1720, with its dramatic rise and fall. We can see spikes in the volume of trading while dogecoin’s price is increasing — no surprise there — but we also see spikes at and past the recent peak of around 68.5 cents. Perhaps that volume in part reflects trading by FOMO investors. I wonder if Newton was alive today, would he have gotten in early, sold at around 30 cents, then reentered the market and invested all of his gains at a price of around 60 cents?
What You Can Do to Avoid FOMO
So, how can you avoid the regrets and fears that Newton experienced? Here’s a checklist for your investments:
- Be disciplined: have a well-thought-out investing plan and stick to it.
- Consider a dollar-cost averaging plan that can reduce FOMO, by consistently investing a small amount every month.
- Avoid peer pressure and succumbing to hot tips from your social network.
- Once you sell an asset, it’s done — stop tracking how that asset is doing.
- Think long-term for your overall portfolio — then there shouldn’t be any need to check how your investments are doing several times a day.
Newton died rich in 1727, with an estate valued at £30,000, perhaps worth $6 million to $30 million today. But the primary reason he died rich is because he was already rich prior to his mishap in the South Sea Bubble. As the saying goes, the easiest way to make a small fortune is to invest a large fortune in [insert latest investing craze here]. If you resist FOMO, then your fortune may be bigger than if you had acted on FOMO, like Newton did. And remember, there’s nothing to fear but FOMO itself.
Stephen Foerster is a co-author, with Andrew Lo, of In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest, Princeton University Press (August 17, 2021).