"JFOMO" Trade

 Jeffrey’s Fear of Missing Out Technique

 

I’ve been wanting to write about the FOMO trade. It’s the “Fear of Missing Out” trade where most people missed the rally from Apr to now. I’ve been meaning to introduce to you the “JFOMO” trade which is “Jeffrey’s FOMO” trade. It deals with your emotions when you have missed out on the rally.

 

Statistically, a 5% correction of the S&P500 occurs twice a year. A 10% correction once a year. A 15% correction once in 2 years. A 20% correction once in 3 years. A 30% correction once in 5 years. A 40% correction once in 10 years. A 50% correction once in 20 years. Sounds about right?

 

If you’re waiting for a correction of 5% before entering, you could be waiting for 6 months and then it happens. During that 6 months, Amazon could rise 60%, Meituan 150%, Tesla 300%. So a 5 to 10% correction may not be worth the wait.

 

So I’ve devised a scheme called “JFOMO”. If you have a budget of 100k, put 10% every month into the trade. If it pulls back to the 50 days moving average, put 20% into the trade. If it pulls to the 150 days MA, put 40% into the trade. You will cure your FOMO anxiety. Of course, stay with 20 – 30% cash and if you are leveraged, keep a buffer of 20 – 30% so that you have the ammunition to enter when markets correct.

 

Fear of a Correction

 

Ironically, the correction happened as I’m writing this. So we have entered the FEAR trade. So from FEAR to FOMO.

 

For investing, as long as it is a great business, there is nothing wron holding on to it. For example, if Amazon will be worth USD5k, USD10k, 20k per share in future, you can just close your eyes and ride it through the short term ups and downsto get there. Of course it always seems like a great idea to sell it when it seems like it is at the top and buy back when it drops back down to the moving averages, however, it is impossible to predict the exact top. After selling it, the prices could still go much much higher you may have to wait several years for the chance to get back in again. However, you could also slowly sell it bit by bit (s.g. 1/4or 1/3) irst and ride the rest. For me, I prefer to use options ot hedge downside (put spreads) and covered calls.

 

The stock market is not the economy and the economy is not the stock market. Corrections are healthy and allows us to get on board of things we never had the chance to buy.

 

Have a good weekend all!

 

Comments

  1. Kyith9 September 2020 at 22:35

    Hi Jeff, I got introduce to your blog from Dr Wealth. Realize you are pretty quantitative about things. Keep the good content coming.

    ReplyDelete

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