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Don't Let FOMO and YOLO Affect Investment Decisions

Don't get saddled with option straddles, either.
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What is FOMO? It's a modern day affliction called 'Fear of Missing Out'. That feeling is prevalent enough to be have been covered in a recent posting on the Psych Central website FOMO addiction: the-fear-of-missing-out.

If you have teenage or tween children you already know that the YOLO (You Only Live Once) mentality is also a problem. It condones risky endeavors. My 25 year-old son has a saying that, "If it doesn't require a waiver, it isn't worth doing."

Traders often know they are playing with fire when they buy or short highly volatile stocks like Amazon (AMZN), NetFlix (NFLX), Apple (AAPL) or Tesla (TSLA), especially just ahead of major news releases. They realize these types of stocks often have no fundamental basis for evaluation.

FOMO and YOLO mindsets give traders implicit permission to go ahead and play high-risk stocks anyway. Suppose they went up big and you didn't own them? Others would be raking in the dough while you were left out in the cold. Worrying about that can make some people crazy.

I live by a quote I heard years ago. I can't remember who said this but the thought always stuck with me. The man said, "I never lost money by not owning a stock that went up."

Others may disagree but I think the best example of unsupportable investing behavior is the purchase of option straddles on highly volatile shares shortly before earnings announcements. That typically involves buying puts and calls on the same stock with the same expiration date. It is a bet that will pay off only if the underlying shares quickly move radically higher or lower.

The buyer of the options doesn't have a clue what the stock will do. He only thinks it will move big in one direction or the other. This is gambling, not investing. You might get lucky and win, but success with that trade certainly does not denote expert analysis.

Why play this way at all? If the underlying shares don't do much of anything you can lose most, or all, of your precious capital with no chance of recovery.

Does anyone know if Fannie Mae (FNMA) or Freddie Mac (FMCC) have any future value? Both stocks have 52-week ranges from about 25-cents to more than $5 per share. The government's failure to put them through official bankruptcy proceedings back in 2008-2009 leaves the fate of their shares in the hands of the justice system. It will likely take years to play out. An ultimate value of zero is a distinct possibility.

I get calls regularly from people who got 'tips' to buy these securities. When I tell them these ideas are better left alone I often hear FOMO rumbling in the background. It would destroy them if their brother-in-law made a killing and they didn't.

The same mentality occurs when an office pool forms to play the PowerBall lottery with its 180 million to 1 odds against hitting. Conservative types often ante up simply out of fear that their coworkers might win while they remain stuck in their job forever.

Don't let irrational feelings get the best of you. The money saved on losing lottery tickets and bad speculations can turn into millions if invested wisely in an IRA account.

In the end, living well is the best revenge. 

The author has never bought a lottery ticket or a long option straddle.