Why Investors Can’t Stop Buying Stocks After Everyone Else Already Has
The savviest investors know they shouldn't buy a stock just because it has risen sharply. They know last year’s winner will not necessarily be this year’s. And they know that by the time a particular investment has become the subject of podcast conversations and social-media posts, all of the easy money has likely already been made.
Yet every market cycle produces the same behavior. A stock begins rising enough to attract some attention. Analysts trip over themselves to be the first to increase their price targets. Media coverage of the company and its CEO expands. Finfluencers who happened to have bought the stock early begin posting extraordinary gains online. And eventually, people who had no interest in the company just six months earlier suddenly become convinced that they’re missing out on the next big thing.
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Performance chasing behavior is often ascribed to analytical mistakes, as if investors simply need access to better information or more financial education. But in reality, many of the experienced investors currently chasing the hottest semiconductor stocks, for instance, already know they shouldn’t be doing it, but they feel compelled to participate anyway.
The challenge with investing in individual stocks in particular is that the fear of missing out can activate one big stew of behavioral biases all at once—from regret avoidance and recency bias to social proof and overconfidence, along with our tendency to assume that whatever has happened recently will continue indefinitely into the future. The more exciting the story around a stock becomes, the harder those impulses become to ignore.
A Rising Stock Eventually Becomes a Self-Fulfilling Prophecy
A relatively small group of AI-adjacent semiconductor and infrastructure stocks has become a magnet for speculative bets. Companies such as AMD, Broadcom, Micron, Marvell and other beneficiaries of the artificial intelligence buildout are experiencing enormous moves—sometimes based on fundamentals such as earnings reports, and other times based on more novel things such as a social media post.
Consider a stock like Micron Technology, which has risen by nearly 200% just this year alone. At the beginning of the rally within memory stocks, relatively few people were paying attention. Nor did they recognize the real impact of the supply/demand imbalance among memory producers due to the insatiable appetite for compute among the largest artificial intelligence model builders at the moment.
Just nine months ago, buying the stock would have required a high level of conviction because the consensus had not yet formed. But now that the stock has risen by close to 200%, the higher price itself begins serving as evidence that the investment thesis must be correct.
The investor who ignored the stock at $300 suddenly becomes interested when they hear it hit $500. And they feel they have no choice but to buy it when it screams up to $750 in just a matter of weeks. So, when the stock hit $1,000 a couple of weeks after that, the market had obviously validated that it was time to buy.
Logically, that seems backward. If nothing else about the business has changed, the investment should have been more attractive at the lower price. However, the opposite action is what’s most common. At $300, buying the stock required an investor to form an independent opinion. But at $1,000, the market has seemingly validated the decision for them. This is social proof expressed through a stock trade.
The Pain of Missing Out
Much of behavioral finance tends to focus heavily on the pain investors experience when they lose money. But another form of investment pain that receives a lot less attention is the pain of having to watch someone else make money on an investment that you considered buying but didn’t.
Even though nothing has actually been lost, this sort of phantom loss leaves investors to agonize over what they could have had. And once that calculation enters the equation, the investor is no longer evaluating the stock from a neutral starting point. Unfortunately, they are now trying to recover a gain they never had.
Thus, the investor is no longer asking whether the stock represents an attractive opportunity at today’s price. Instead, they are attempting to correct what now feels like a mistake they made months ago. And ironically, the larger the gain they missed, the greater the pressure becomes to finally participate in the trade, which means that the rapid price appreciation that should make them more cautious becomes the very thing that convinces them to buy.
At some point, sitting on the sidelines begins to feel more painful than the possibility of losing money, which is how otherwise disciplined investors find themselves buying at precisely the moment when everyone else has already arrived. But it’s worth considering that sometimes, the smartest thing you can do is simply acknowledge that you missed it, and add that ticker to your watchlist in case another opportunity to buy in at a reasonable price presents itself.
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Malcolm Ethridge is the Managing Partner at Capital Area Planning Group, based in Washington, D.C. His areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
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Disclosures:
The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your tax and legal advisors before taking any action that could have tax and legal consequences.
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