Stocktake: FOMO blinds traders to risks

In Jason Zweig’s Devil’s Financial Dictionary, risk-averse is defined as “not willing to take more risk – yet. When assets double or triple in price, even the most risk-averse investor will finally want to own them”.

Zweig’s definition is looking apt right now. FOMO – fear of missing out – is currently driving many sane people to do many insane things. It’s easy to be green when you read about the likes of Anubhav Guha, a GameStop day-trader who turned $500 into $203,411 in less than three weeks.

As Ritholtz Wealth Management's Ben Carlson notes, however, day trading is not easy money. For example, a study of Brazilian day traders found 97 per cent lost money and only 1.1 per cent earned more than Brazil's minimum wage.

Face reality

It is, the study concluded, “virtually impossible for an individual to day trade for a living”.

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Worse, many are slow to face reality: a study of Taiwan day traders found not only that the “vast majority” were unprofitable, but that many persist despite “extensive experience” of losses. “Trading to learn”, it concluded, “is no more rational or profitable than playing roulette to learn”.

The latest brigade of day traders will hope they can buck the historical trend, but this will end badly for most – it always does.