Comment: "I can lose everything" – Investors have a taste for risk

Despite the stock market volatility of recent weeks, private investors' willingness to take risks does not seem to have wavered in the United States. "I can lose everything tomorrow," commented one private investor with a strong buying (or yolo?) stance in a recent WSJ article. According to the article, private investors bought a net USD 21 billion worth of stocks and ETFs in the two weeks following "Liberation Day". Among them were speculative leveraged ETFs, which I talked about a moment ago in Vartti (in Finnish). Earlier this year, in February, a Bloomberg strategist commented on the market as a "paradise for degenerates".

The phenomenon is not surprising. Especially with the coronavirus crisis, the popularity of investing and day trading exploded. In the internet investment culture, memes became more common, which colored the sometimes-tedious everyday life of investing. The market frolics of the last 15 years, and especially the parties of the last five years in the United States, have taught everyone that every dip is a buying opportunity.

The continuation of the phenomenon from year to year has made me wonder whether the behavior of a certain investor demographic (approximately 20–40-year-olds) is, as it were, structurally different compared to the generally more cautious-seeming behavior of older investors. The older guard has experienced the bursting of the tech bubble in the early 2000s and the financial crisis. In Finland, even older investors remember the depression of the 1990s and the great stock market crash as a special experience. I don't think many people remember the "dead decade" of stocks in the 1970s, except for Warren Buffett.

In the fall of 2021, in Vartti, I brought up the bullish strategist Tom Lee's argument about the "millennial bull market". At that time, Tom Lee spoke of a 17-year bull market driven by the more risk-taking investment behavior of the millennial generation. The chips for buying stocks and cryptos come from older people, as millennials are estimated to inherit USD 76,000 billion by 2042 in the United States. Because they are willing to take more risk, it favors the rise of the stock market, according to Lee. Unsurprisingly, Cathie Wood, the queen of the then-tech rally, also took up this argument.

Michael Howell, who follows liquidity, has speculated in several interviews that young people think that cryptos are a hedge against inflation, and as inflation accelerates with ever-growing government debt, there may be a redistribution of wealth. In Germany in the 1920s, older generations were shocked when the youth of the time invested in stocks. In hyperinflation, however, stocks somehow held their own, while the "boomers" of the day, who traditionally invested in bonds, lost practically all the purchasing power of their savings. Is the same pattern repeating itself now, but stocks are yesterday and cryptos are today's best asset protection? Time will tell. However, stocks have cash flows made in the real economy, while cryptos are held together by investors' interest and a money-paying plug in the wall.

"No risk, no rari" is a common saying in the depths of the investment internet. In the WSJ interview, one person who invested in Gamestop options described himself as a "degenerate gambler". "This is a screaming buying opportunity," commented a man holding 7-figure savings in cryptos and Strategys as he bought Bitcoin by the truckload in the early April dip.

Are 20–40-year-olds really different risk-takers? Generations are a somewhat artificial invention. A Generation X investor born in 1980 is hardly any different in practice from a millennial born in 1981, although the generational milestone is often placed in between. On the other hand, "generations" are marked by certain common experiences at a similar stage of life, and cohorts are used a lot in marketing. However, talking about the risk appetite of one generation as a generalization is quite inaccurate, and it forgets all the nuances beneath the surface.

However, it is good to remember that every investor is a prisoner of their own memories, and one's limited experience of the market may not work as a good rule of thumb for future development. As an example: I am sometimes surprised at how many people take the rise in house prices for granted and as an automation, even though the development of Finland's remote regions and even the Helsinki metropolitan area in recent years proves quite the opposite. Our understanding of the past is also refined by new data and calculations. Many readers have surely heard of Jeremy Siegel's classic book Stocks for the Long Run. It presents data on how stocks have hardly ever lost to fixed-income securities when measured over a 20-year period. However, a new study published in 2021 found numerous 20-year periods in which stocks underformed bonds in returns.

One thing that unites younger investors, however, is the lack of steep and deep crashes on their list of personal experiences. Perhaps millennials are not innate degenerate risk-takers – they just lack experience of a brutal bear market. And this, too, is a generalization. What else have many young Finnish investors experienced than “mörniminen” of Hesuli and "scam market and crises", as they say on the forum.