Investor FOMO vs. Intelligent Investing
You can tell something isn’t quite right in the markets when people start buying millions of shares of the wrong stock.
Before January 7, hardly a single share of Signal Advance was being traded. But from January 7 to January 11, the company saw its stock jump over 6,200% on frenzied buying…
While it looks like an amazing gain, there’s one big problem: People were buying for all the wrong reasons.
They weren’t buying because Signal Advance was a solid company or rising star. In fact, CNBC reports that the company is so small, it doesn’t report financials with the Securities and Exchange Commission.
Instead, traders piled in because on January 7, Tesla’s CEO, Elon Musk, tweeted: “Use Signal.”
Now, Musk was referring to the Signal messaging app.
Not long ago, popular messaging app WhatsApp changed its privacy policies. Many users felt their personal info and messages wouldn’t be as safe. But the Signal app offers its users a high level of encryption. That’s why Musk was recommending it to his 41 million followers.
The app saw a huge surge of signups as a result. And traders believed they could profit if they invested in the app.
The only issue with that is that Signal is a private company. You can’t buy shares of it.
But traders were too eager to buy and missed this crucial detail. They mistakenly bought Signal Advance shares instead because of its similar name.
Of course, this isn’t the first time that traders have mistaken similarly named companies.
In 2013, when Twitter was about to have its initial public offering (IPO), people started buying shares of Tweeter Home Entertainment Group. And when Zoom Video Communications had its IPO in 2019, Chinese company Zoom Technologies saw a sudden rise in its stock for a few hours.
Now, it makes sense that people wanted to invest in these popular IPOs and get in during the early stages. But the reasons surrounding Signal Advance’s rise makes zero sense.
Making a mistake on a company ticker is bad enough. But scrambling to buy a stock just because of a Tweet from Elon Musk is just crazy. That’s not intelligent investing — it’s investor euphoria.
And today, I want to share with you why this euphoria has the Alpha Investor team concerned — and what you should do to prepare…
Everything’s Up — That Gives Investors FOMO
It’s no secret that the markets have made a huge comeback despite the COVID-19 recession last year. Since the market lows in March 2020, the S&P 500 has soared about 72%, the Nasdaq 97% and the Dow 67%.
These major indexes hit new all-time highs just a few days ago. And investors show no signs of slowing down.
But when I spoke to Alpha Investor editor Charles Mizrahi about it, he told me why this investor euphoria is a cause for concern.
Right now, people are buying stocks simply because they’re going up. They’re buying because of FOMO — the fear of missing out.
Because they don’t want to miss out on potential gains, they keep buying and pushing prices higher and higher.
And after witnessing many market cycles on Wall Street as a trader for nearly four decades, Charles knows that this kind of buying frenzy never ends well. He says it’s a warning sign. Here’s why…
Pay Attention to the Red Flags
Investors pushing the market higher and higher means that the stocks currently in our model portfolios are doing well as they continue to rise.
But it also means that there are fewer and fewer companies out there trading below the worth of their businesses. Remember, as Alpha Investors, this is an important part of our approach…
By buying companies with strong financials and rock-star leadership that are trading at bargain prices, we’re maximizing our potential profits.
But over the past few months, I’ve seen firsthand how the current euphoric markets are impacting these bargain opportunities. Lately, as I’ve worked with Charles each month on the research for Alpha Investor recommendations, several stocks on his watchlist have blown way past our ideal prices.
It hasn’t been impossible to find bargain opportunities, but it certainly has been tougher.
And Charles’ experience has taught him that when bargains are scarce, it’s time to be on guard.
Now, no one has a crystal ball. We can’t tell you what the exact catalyst for the next market downturn might be. But as long as you’re prepared, it won’t matter.
So today, we want to remind you: Don’t chase stock prices. Especially in frothy markets like these, you don’t want to buy high. As Charles always says…
“The biggest factor in an investment’s return is the price you pay. Even a great business will produce terrible returns if you buy it at a high price.”
And get your shopping lists ready. Have funds that you want to buy already in your mind. Because when the inevitable market pullback does come around, it’ll give us many new bargain opportunities to profit from. In the meantime, be sure to only buy stocks that are trading at or below their buy-up-to prices.
And if you aren’t an Alpha Investor yet, consider joining us right here. While bargain opportunities aren’t a dime a dozen right now, Charles has still been able to find a brand-new one that he’ll be sharing with subscribers soon.
Managing Editor, Alpha Investor