How YOLO and FOMO Affect Investing

A stock can be categorized as large cap, mid cap, or small cap. It might be growth or value, domestic or international.

Now, to a very long list of categories, we can add YOLO and FOMO. While it’s all anecdotal, let’s take a look.

YOLO and FOMO

According to Axios’s Felix Salmon, YOLO and FOLO helped to propel the Pandemic bull market:

YOLO–you only live once–encourages risky behavior. Whereas prudent investors stick to the wonders of compound interest, others try to build wealth more recklessly. In a zero interest rate world, they select the “low-probability/ultra-high-return” bet.

Meanwhile, the FOMO phenomenon–fear of missing out–is a bull market byproduct. As the indices climb, and your friends let you know how much money they are making, it becomes increasingly tough to remain cautious.

The Axios newsletter concludes that YOLO preceded and outperformed FOMO.

Examples? For YOLO, Mr.Salmon cites Tesla and GameStop. But wait…aren’t they also FOMO?

Our Bottom Line: Investing Incentives

Whether we have accurately described the YOLO and FOMO investor is less important than their financial territory. Moving us to a very different place, a Warren Buffett bet reflects entirely different investing incentives.

During 2008, he and a hedge fund manager agreed to a ten-year $1 million wager. In Mr.Buffett’s corner we have the S&P 500–a plain vanilla list of 500 stocks that varied only when firms entered and left the index. On the other side was an actively managed hedge fund. (It also made a difference that the index fund was low fee while the hedge funds charged much more.)

Although the contest was supposed to end after a decade, they stopped sooner because the Buffett lead was so large. With cumulative gains of 22% vs. 85.4%–$220,000 vs. $854,000–the hedge funds’ average was far behind. Even now, shifting our time frame to the 2011-2020 decade, still the index fund has the higher return.

At this point I should qualify the results because the dates that frame a bet can determine its results. And there were a few 10-year spans when the hedge funds were ahead.

However, as behavioral economists, our focus returns us to the incentives that distinguish YOLO, FOMO, and hedge funds from index fund investing.

My sources and more: Today’s ideas were a combination of yesterday’s Felix Salmon Axios newsletter.and an AEI post on Index funds. Finally, you might enjoy looking at when we first focused on FOMO and FOBO. (Please note that several sentences are from the past post when we first looked at the Buffett bet.)