Phillip, a first-year student, was just 21 years old and still living with Mom when he bought his first shares.
His mother, who had taken several investing courses, had been trying to get him interested in investing for the last five years.
Initially, she was happy to see him invest in stocks. When Philip asked if he could borrow $5,000 to invest, she immediately said yes – no questions asked.
She later regretted it when she discovered he’d placed all the money in one stock: GameStop.
“I know I can lose all the money, but I’ll probably get it out before then. Besides, if I lose the money, I lose the money,” he told Mom when asked.
His interest in investing picked up during the first lockdown when both classes and his birthday party were cancelled. He spent most of his time reading the news and chatting on social media while doodling at the kitchen table in his mother’s apartment. Stocks hit the news with a plunge and a quick rebound.
He saw the V-drop shape and thought something like, ‘Hey, maybe stocks aren’t as boring as I thought. Mom’s onto something.’
That’s when he began investing.
First, it was a way to make a few quick bucks. Then he discovered there was a big community online of people just like him. He also realized that he got a kick out of it when he made some quick gains.
How did things turn out for Philip’s GameStop investment? We’ll never know, because Philip is a composite character of several people I’ve talked to.
Maybe he sold before the stock imploded. Maybe he lost most of it.
Philip is a YOLO investor (You Only Live Once), and people like him are getting a lot of attention in the stock market news these days.
It’s even a verb. You can YOLO in the stock market. These YOLOing YOLOers can influence how the market will develop in the future.
The fact is, there have rarely been as many private investors in the stock market as there are right now.
Private individuals now account for almost as much of the volume of the US stock market as institutional investors such as pension companies and mutual funds, according to numbers from Bloomberg published in this Financial Times article (sorry paywall).
Not only are private individuals flocking to the stock market, but this new investor, the YOLO, has emerged, and they’re not behaving like the rest.
YOLO investors arrived with the pandemic.
Like Philip, they were tied to a screen at home during lockdown, and many of them have gained access to a bag of money they did not have before, like the US stimulus check or other corona-related subsidies.
What else do we know about these YOLO investors?
1. They Gamble
The YOLOs invest short-term and aim to make their money multiply in a few days or weeks.
They approach the stock market as if it were a one-armed bandit, betting on hitting the jackpot. They go for profitable long shots, not incremental gains.
Saving for retirement is more distant to them than a space station.
They invest as if there’s no tomorrow – that’s the whole idea of you only live once.
2. They Invest Borrowed Money
They use margin on the account, they borrow money from various sources (like “mom”), and they use leveraged products.
They’re simply not at all afraid of losing borrowed money.
3. They’re Poorer
They have less money than previous generations of private investors.
How much do they have?
Typically between $1,000 – $5,000 in savings, according to the article from FT – and many have no savings at all. If they don’t have savings, they’ll borrow the money.
By comparison, the typical private investor during the dotcom bubble had about $50,000 to invest.
4. They Are Younger
They’re in their early 30s – and often much younger.
Compare that to the generation of private investors who invested in the dotcom bubble. They were about 50 at the time (so around 70 now).
The YOLO investors are so young that they were still playing with their LEGOs when the financial crisis raged. A serious stock market crash belongs to the dusty history books.
Which might be one of the reasons they don’t seem to fear a crash.
A 12-year-old bull market is an eternity if you’re in your 30s or younger.
5. They Use Social Media to Make Investment Decisions
They’re more likely to trust a stranger on social media than a financial expert on TV.
They grew up with social media, and social media is where they socialize and develop their worldview.
They’ll discuss stocks and private details about their financial position with strangers online, no problem.
They aren’t afraid of writing something like:
“I have $10,000… What should I invest in if I want the money doubled in a year?”
What’s astonishing about them is that they’re likely to do whatever a stranger with an alias tells them to do.
6. They Invest with an Activist Mindset
They invest in Tesla because they want less air pollution.
They invest in Beyond Meat because they cheer for Greta Thunberg.
They invest in GameStop to drive hedge funds out of their short positions.
They invest in cannabis stocks because they want cannabis products.
They invest in bitcoin to defy the government monetary policy (the eternal printing).
They invest because they want their money to make something happen in the world.
7. They Love All Tech
Their favorites are fintech, biotech, blockchain, all crypto, gaming, and Tesla.
They admire Catherine Wood from Ark Invest and the SPAC king Chamath Palihapitiya – they might even have one of them on a poster or a coffee mug.
8. They Use Commission-free Stock Trading Apps
They trade through commission-free apps on the fly.
They don’t need to sit themselves down in an office chair at a big desk with a steaming cup of coffee and a pair of reading glasses to enter a stock.
They grew up playing with a smartphone while eating cereal, and they’ll happily trade stocks on an app while taking the subway or chatting with a friend (or a stranger online).
9. They Love Fractional Shares
On a platform like Robinhood, it’s possible to buy so-called fractional shares, which is a small part of a stock.
They love this stuff, because they don’t always have enough money to buy the whole thing.
For example, most of them don’t have $3,000 for a share in Amazon or $2,000 to buy a stake in Google.
10. They Don’t Care About Compounding
They invest now to get money now. They’re in it for the instant gratification.
Investing to get solid in retirement doesn’t rhyme with you only live once.
How will YOLO Investors Affect Your Stocks Going Forward?
When a large group of shareholders enters the stock market and when they behave atypically, it can affect the entire market.
Since “YOLOing” is a new phenomenon, none of us know exactly how they’ll behave going forward – they’re really a bit of a joker in this stock market game.
But here’s my best bet on what they’ll mean for you and your stocks:
A. Greater volatility.
When YOLO investors jump on a stock like a swarm of grasshoppers, the stock price could potentially rise to astronomical levels and implode afterwards, as we saw with GameStop.
B. More uncertainty.
We don’t know how they’ll react to certain events. They aren’t investing in their retirement funds, and they don’t think long term, so certain events might trigger them. These could be:
- Taxes: What happens when they realize they have to pay taxes on their gains for 2020? Are they even aware? As they don’t have a lot of excess cash, tax liabilities in the spring might cause shares to plunge if they have to sell shares to afford paying them.
- A correction: How will they react to a correction? Will they panic? Or stay cool? The fact that they have no experience with the financial crisis might mean they’re in for a surprise. On the other hand, many YOLOers began investing after that V-shaped plunge during the first lockdown – this might suggest that they aren’t afraid of stock volatility. However, they weren’t there for the steep plunge. They came in with the reversal and only enjoyed the ride up.
- Reopening: What happens when all the covid restrictions disappear? They entered the market pushed partly by boredom. Will they sell all their shares and fly to Bali when the world reopens?
What should you do?
Now, more than ever, it’s really important to check the facts and the numbers on a company before you invest.
When volatility and herd mentality come into play, it’s vital to make sure there’s a connection between price (stock price) and value (value inside the company).
You have to go through a checklist (you can download mine here) and do some basic calculations.
My favorite way to check what a company is worth is using Warren Buffett’s owner earnings calculation, which you can learn about in my e-book right here.
Don’t forget to read my free e-book that explains my whole investing process – including my favorite way to calculate what a company is worth. You can get it here.