YOLO: The New Investment Strategy That Rakes in Millions to Young Investors, But Remains Risky

The adherents of the YOLO movement are a young bunch of diehard optimists believing in a single stock and its future performance, pitching in all the chips they have, while hoping for the best.

The meme phenomenon has spread far and wide beyond the obscure dark and not-so-dark humor online boards into the financial market, with crypto meme coin tickers taking up the precious characters of Tweets posted by some prominent investors like Elon Musk. But it has recently overspilled into the conventional financial industry of Wall Street, taking on the form of the YOLO movement.

This bizarre phenomenon has seen stocks being pumped beyond even the most optimistic prices by online message boards in an almost coordinated tidal wave that swept across the booming market through 2020 and 2021.

Birth of a legend

With over 80% of investors in YOLO stocks being born in the late 1990s, their overconfidence in continued market growth is staggering, allowing them to take on leverage in the form of credits and debts to start investing in selected stocks. And though there is no actual asset class that could be termed YOLO, it pertains to companies that have posted immense gains and generated headlines during the pandemic lockdown period.

Among the most notable examples over 2020 to 2021 are AMC Entertainment (AMC), which skyrocketed by over 2,000% in just under a year, and GameStop (GME)– up 5,232% in the past year. Others in the league are Bed, Bath & Beyond (BBY) with 328% gains, Blackberry (BB) – 113% year-to-date, and others.

It all started in early 2021 with GameStop Corp. (GME), which saw its stocks boosted by a group of Reddit users who started investing in it and attracted others to do so. The price soared tenfold from $4 in 2020 to $350 in early 2021. And though stocks eventually took a nosedive to $40 by February of 2021, the GME saga allowed some investors to make millions in short positions on its traction in under a few weeks.

Needless to say, a legend was born that took on a life of its own and spread like wildfire, feeding on the hype frenzy and the trusting nature of YOLO stock investors.

In fact, stocks with considerable short interest attract droves of buyers. In turn, the short-sellers have to start covering their positions by buying back the shares that they had previously borrowed and sold. Such a rush results in massive artificial demand fueled by message board posts, pushing prices up.

The risks

Youth is oftentimes described as a disease of inexperience. And rightly so, considering the young age of most investors in YOLO stocks. Such inexperience in true market dynamics is the reason why the strategy is extremely risky, as most investors in one-off stocks hyped by message boards have never seen a bearish market, nor have they any clue of what a market crash looks like.

Considering that, and the fact that many of them are investing borrowed funds, their life savings, or even their mom-&-pops’ money, is painting out an eerie picture of the potential consequences of what a sudden market crash or shakeup could result in.

Past the fun and excitement of YOLO investing lies the harsh reality that only a meager portion of quick in-&-out investors rake in millions on the strategy. The risks far outweigh the benefits, as the odds of losing all are roughly the same as making some.

Intuition and message board posts from users pursuing their own interests are far from ideal investment consultants. When taking on the murky path of YOLO investing, one must never forget about portfolio diversification — a pillar of investment management that most young investors simply disregard.

Apart from offering some interaction with a community of concurring investors that may vanish as quickly as the investment in hyped stocks, YOLO is not a sound long-term investment strategy. The mere fact that YOLO stocks were chronic underperformers is a clear indicator that their price spikes are doomed to be grounded the moment the hype wears out.

However, if one is eager to try out YOLO investing, the first step would be to select the proper stocks. Reddit channels like Wallstreetbets are the go-to venue, where heated discussions and real-time updates can shed light on potential unicorns and gems. Doing some proper research is also vital, making sure that selected companies have high short interest and available call options, so essential for leveraged investments and bets on positive price traction.

Invest cautiously

YOLO is a fad, a fleeting phenomenon that is certainly not for the average or inexperienced investor. Such stocks are best suited for professional traders with leverage to spend, while novice or entry-capital market players should opt for lower-risk instruments like growth stocks, value stocks, dividend stocks, and large-cap stocks of major companies.

Considering that a great many YOLO investors entered the market out of boredom during the first lockdowns, or after being chatted into it by friends and message board users, the risks they bear with every cent injected are immense. YOLO is more like gambling with borrowed money, where the chances are teetering on the edge of the blade either way.

Far worse is the fact that YOLO stocks serve the experienced investor and the lucky few, attracting droves of fresh liquidity providers by splaying a handful of success stories as the norm of future stock performance for all involved. With less experience and even less money than previous generations, YOLO investors are playing naked with fire.