While starting out as an investor in the startup space, it is important to not let FOMO come in the way of your decision-making.
It is hard to ignore the Fear-Of-Missing-Out when trending investment opportunities come your way. But angel investing, like everything else, is best-rewarded after rigorous discipline.
At Windrose Capital, we pride ourselves on being disciplined investors. In fact, paying testament to this, our investment thesis's first page has Warren Buffet’s quote “We don’t have to be smarter than the rest. We have to be more disciplined than the rest” engraved. And we make sure, we stick with it at all costs.
Being in the VC industry, we see all sorts of industry trends every now and then. One way to keep your head firmly rooted is to ensure that all the noise outside doesn’t get to you. Winning with trends might reward you once but it will not give you the consistent long-term returns that you might be after.
The fear of missing out in the investing world will often win over rational decision making. A few of the ways you can curb your enthusiasm is by:
Be Cautious: If it’s too good to be true, it probably is too good to be true. Succumbing to an opportunity without understanding its business isn’t going to benefit your capital in the long run.
Due Diligence is your best friend: A well-defined research on the basics of the business, the industry and the founders, should be a practice to be maintained at all times. Many attractive opportunities don’t appear to be so attractive after you’ve done your research and figured out that the driving numbers are hiding something.
Stick to your thesis: Your investment strategy should dictate your every move. Oftentimes, attractive opportunities may come from different industries that aren't included in the thesis. In these situations, the best bet is to figure out whether such opportunities will help you attain your financial goal in the long term. Read a quick guide to creating your own investment thesis.
Overcome your Biases: Many popular mental models talk about certain behavioural biases that may hamper our decision making. When it comes to FOMO in the investing world, it is important to recognize these biases and actively seek ways to reduce them. Few ways to do so could be discussing such opportunities with financial experts or seeking out materials that contradict their popularity. This would give you more ways to look at the deal and then you can make a well-rounded decision.
Financial markets are often built on hype. Hype that collapses leaving investors to grieve on their own. This is often accompanied by bad decision-making, wishful thinking and little to no due diligence.
“Trends are addictive; to remain disciplined and avoid hype is to deny our innate instincts.”
It’s human nature to follow the crowd and give in to the hype from time to time. But making a habit out of it and being irrational in decision-making, especially when the price to pay is large sums of cash, is a price too high to pay for our fear of not conforming.
This fear also prevents us from making well-thought-out and intelligent decisions for ourselves.
One way to survive both the ups and downs of the market is to have an intelligent investment strategy that is well-diversified. Such a plan ensures a steady long-term plan that is flexible and encourages high returns consistently.
Though FOMO is a new term, the basic principle of investors irrationally mimicking other investors (also known as behaviour herding) has been here for too long, with even Warren Buffet commenting on it: “be greedy when others are fearful, and fearful when others are greedy.”