Learn the stock market › Market psychology › Lesson 2 of 6
FOMO in investing
Where the feeling comes from
A stock that has risen for a long time is visible. It is in the news and on forums, and the people who own it like to talk about it. The rise that has already happened feels like proof that it will go on. But anyone buying now only gets what happens from here.
After a big rise
We took every trading day on which one of the companies had risen 50% or more over a year, and looked at the price a year later. The 50% is our own choice. All days are shown for comparison.
| Days | Higher a year later | Middle move a year later | At least 20% lower on the way |
|---|---|---|---|
| All days (106,168) | 75.4% | +18.4% | 26% |
| After a rise of 50% or more in a year (21,436) | 71.8% | +24.0% | 36% |
After a big rise the price was higher a year later less often than for all days, 71.8% against 75.4%.
The middle move a year later was +24.0%, against +18.4%. So a rise could go on.
But the road was rougher. After a big rise the price stood at least 20% lower at some point in the year in 36% of cases, against 26% for all days. Stocks that have soared often swing more, both ways.
What the table does not say
The companies are today's largest. Those that soared and then left the market are missing, so the picture is probably brighter than the real one. The same question for the whole market, after a big rise in the S&P 500, is in the lesson on bubbles. Why a rise so often seems to have been visible in advance is the subject of the lesson on hindsight bias.
Test yourself
A stock has risen 80% in a year and everyone is talking about it. What does the table say?