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Goldman Sachs, Chico's, GameStop, Chewy and Apple highlighted as Zacks Bull and Bear of the Day
Read MoreHide Full Article
For Immediate Release
Chicago, IL – January 29, 2021 – Zacks Equity Research Shares of The Goldman Sachs Group, Inc. (GS - Free Report) as the Bull of the Day, Chico's FAS, Inc. as the Bear of the Day. In addition, Zacks Equity Research provides analysis on GameStop Corp. (GME - Free Report) , Chewy, Inc. (CHWY - Free Report) and Apple Inc. (AAPL - Free Report) .
Goldman Sachs is a captain of high finance and the banking sector's knight in shining armor. The firm is known for its quick trading action and best-in-class deal-making investment bank. GS has soared 45%, hitting all-time highs, since Biden was elected President on November 3rd. The shares have been met with a recent pullback that represents an excellent buying opportunity.
Volatility is coming back into the market and I have no doubt that Goldman's best-in-class trading & sales team are taking full advantage. The $275 per share that GS is trading at today represents a robust purchase price for a long-term investment in the gold-standard of high finance. GS bounced off my highest Fibonacci retracement just south of $310 and are coming back down to a strong resistance level north of $260, where the 261.8% retracement and 50-day moving average are approaching convergence.
The economic downturn and proceeding recovery have been an unexpected tailwind for Goldman, driving the business to record profitability the past 2 quarters, with a robust double-digit topline expansion. Due to Goldman's trading and deal-making profit drivers, the bank didn't see the same margin-pinches from the ultra-low interest rates that commercial banks like JPMorgan and Bank of America did.
GS is expected to continue pushing growth and profitability as a slew of big deals and market action extends into 2021. Analysts have been increasingly optimistic about GS following its record earnings on Tuesday, pushing its EPS estimates on every time horizon and propelling the stock into a Zacks Rank #1 (Strong Buy).
Recent Earnings
The firm illustrated unbelievable results in the wake of economic uncertainty, taking advantage of new market opportunities. GS reported record-breaking earnings of $12.08 per share, demonstrating 158% year-over-year growth, and blew Zacks Consensus estimates out of the water by over 72%. Its sales were quite strong as well, showing $11.74 billion, up 18% from the same quarter last year, beating estimates by 22%.
Equity trading and its deal-making investment banking (IB) segment were the two largest growth drivers for this best-in-class investment bank. Goldman's investment banking sector was up 24% in 2020 compared to 2019, and this segment looks like it's just heating up with Q4 IB earnings up 33% from Q3 and 27% year-over-year. Its equities-underwriting portion of IB was booming in 2020 as a record number of businesses hit the public exchanges.
454 companies IPO'd in 2020, raising over $167 billion, far surpassing the previous record made in 1999 amid the dot-com mania. Goldman was an enormous beneficiary of this push to the public markets. The firm drove over $3.4 billion last year from equity underwriting alone, up 130% from 2019. It looks like this subsegment is only beginning to simmer, with this past quarter generating $1.12 billion, up 195% year-over-year and 30% quarter-over-quarter.
GS's global markets division was its biggest topline driver as the business strategically navigated the choppy market waters and drove this segment's revenue up 43% to a record $21.16 billion, 47% of its total topline in 2020. Equities sales & trading at Goldman appear to be still riding a tailwind as the stock market surges to seemingly no end. This group is up 16% quarter-over-quarter.
What's Next For GS?
David Solomon is proving himself at the helm of this remarkable firm. Since Solomon was named CEO and Chairman of Goldman Sachs on October 1st, 2018, GS shares are up over 22.4%. This may not sound like a lot, but GS has navigated the 2018 year-end sell-off and the most significant economic contraction in over a decade. GS is sizably outperforming its cohorts JPM and BAC, who have only returned 15.4% and 2.7%, respectively.
Investors & traders pulled profits from all the major banks following earnings over the past few weeks. GS was no expectation as its share price dipped from an all-time high of $309.41 down to the $275 we are trading at today. This has created a tremendous buying opportunity, with 10 out 14 analysts calling GS a strong buy today.
Price targets have risen across the board following the record quarter results on January 19th. The most optimistic are north of $445 a share, representing a 62% upside and even the more conservative recent estimates represent sizable double-digit returns. The large upside potential combined with the firm's nearly 2% dividend yield makes GS a strong long-term buy and hold today.
I remain a GS buyer despite the run it has already had since the March lows. This company is adaptable and resourceful, and no matter what the economy throws at it, GS comes out on top.
Chico's participated in the recent brick-and-mortar retail rally driven by speculative retail traders from a Reddit message board called WallStreetBets. This cohort of Gen Zs and Millennials targeted some of the most shorted stocks on the market and were followed in by hedge funds and prop trading firms that propagated a historic short-squeeze, which seems to have moved a number failing business amid the retail apocalypse, which included CHS.
This stock is trading above the most optimistic price targets and I would liquidate any positions that I had in CHS, thanking god that I was able to get such a good price for them. I would recommend not taking on any position in this company.
Retail Apocalypse
The retail apocalypse is exploding amid this global pandemic, and no brick-and-mortar business is safe. Chico's is one such business that has not been immune to the COVID driven economic downturn. CHS has lost 78% of its value in the past 5 years, and it continues to disappoint investors with a 45% breakdown so far this year. Sell-side analysts are becoming more pessimistic about this stock and continue to lower expectations pushing this stock down to a Zacks Rank #5 (Strong Sell).
The Business
Chico's is a women's fashion brand that began out of Sanibel, Florida 36 years ago. The company operates three separate retailers, branded Chico's, White House Black Market, and Soma.
The peak of this retailer's performance was back in 2014 but has since fallen prey to the changing digital commerce landscape. Amazon and the other large online retailers have left less versatile firms like Chico's in the dust. Chico's operated 1,547 stores in 2014 and has since closed 129 stores and expects to close another 250 over the next three years.
This once women's fashion icon's inability to adapt to the digitalizing world has led to a sales decline in the past 19 out of 20 quarters and shareholders have suffered. Chico's revenue decline is expected to continue in the years to come.
Chico's bottom line has flipped negative, and its losses are accelerating seemingly every quarter. The business is quickly running out money, and this pandemic may be the straw that broke the camel's back for Chico's.
The best thing that could happen to Chico's at this point is an acquisition. Otherwise, I see this archaic enterprise fizzling into bankruptcy, and that is what investors & traders have
CHS is soon to be a penny stock trading at $2.25. This low share price causes accentuated volatility, adding more risk to any investor holding these shares.
Take Away
The retail apocalypse is real, and the COVID-crisis is pushing brick-and-mortar retailers that haven't adapted to the evolving consumer out of the market. Chico's is just another teetering retail domino getting ready to fall. There are significant systemic issues with this company, and I would not put any position on this stock at this time.
Additional content:
Some Advice for the GameStop (GME - Free Report) "Rebellion"
The story of the meteoric rise of the shares of GameStop is actually a number of stories. It started as an informal group of traders communicating in online message boards – most notably Reddit's Wallstreetbets/ forum – and trading in unison. Those traders collectively determined that shares of GameStop had such high short interest that if they began buying those shares and call options in a coordinated manner, they would force the funds who held short positions to cover their positions at higher prices.
It was a fairly classic "short-squeeze" and it worked.
GameStop started 2021 trading at $17.25/share. By January 15th, it had exactly doubled to $35.50/share after the news that week that Chewy founder Ryan Cohen had amassed a nearly 13% stake in the company and would be joining the board of directors - ostensibly to guide the company's transition from strip mall brick-and-mortar retailer to online presence.
It was a "comeback" story.
On Friday January 22nd, GameStop closed at $65/share and the short squeeze had become a rout, inflicting severe losses on at least two well-known, short-selling hedge funds.
That's also when even more stories began to develop. It was no longer simply about exploiting an inefficiency and making a profit from it. The tone of the online messages among the GameStop faithful shifted significantly toward enthusiasm about inflicting pain on hedge funds and other professional investors.
"Little Guys Take on the Big Guys and Win!" Is an easy headline to love. So are stories about people using profits from the trade to pay health care bills or pay off student loans. The "steal from the rich and give to the poor" aspect of the trade added to its popular appeal.
The threats of violence against opposing traders and journalists makes the feel-good story feel considerably less good.
The desire to make money by risking your capital in the markets and having your thesis proven correct is not only understandable, it's necessary. The role of speculators (including short-sellers) is fundamental to the healthy functioning of financial markets.
In addition, many of the Wallstreetbets traders have expressed the notion that they don't care if they lose money, as long as they have caused pain to the Wall Street "elite." They're trading to express their anger rather than amass profit. That's ridiculous.
(What's also ridiculous is that last night, Apple reported the results of a very successful quarter that included $111 billion in revenues and almost no one is paying attention. The worst part about the GameStop episode for those who have no interest in participating may be the distraction it's causing.)
Here's my advice:
The best traders want to make the most money possible while taking the least risk possible.
Period.
Trying to exact revenge from the faceless counterparties that you believe have somehow wronged you in the past is an inefficient endeavor -- and one that's very likely to end up with you losing money. It's human nature to engage in Schadenfreude from time to time, but it's a fundamentally non-constructive activity. Trading with the objective of hurting another market participant interferes with your own objectivity.
Your goal should not be to "beat the market" or to beat any specific party, it should be to put as much cash as possible in your own pocket. If you see an opportunity to squeeze someone else who puts themself in a disadvantaged position, by all means take it. Those are the situations that great trades are made of. But do it because you see the opportunity to be disproportionately rewarded for the risk you take. Do it because you want the money. Don't do it because you "hate" the other guys or are jealous of their previous success.
One of the great trades of our time was George Soros versus the Bank of England in 1992. (If you don't know the story, look it up – it's fascinating.) In a nutshell, Soros correctly surmised that Great Britain didn't have the resources to continue supporting the Pound and he successfully shorted it and made over a billion dollars in the process.
Soros didn't hate England. He didn't want to "stick it to them" or intentionally cause harm to British Central Bankers or ordinary citizens.
He just wanted the money!
There's another aspect to the GameStop trade that I'd like to address. It's the concept of patience in investing. I fully understand that when you're 25 years old, you want to get wealthy now. Making a huge score on a single trade is an extremely attractive concept. Unfortunately, it's also not very realistic.
Ken Griffin of Citadel was just like you once. Citadel was literally founded in a college dormitory room. Griffin recognized that the market often wasn't correctly pricing convertible debt efficiently and that he could make small but consistent arbitrage profits by trading mispriced convertibles against plain-vanilla bonds and listed options. He built on his early successes and eventually built one of the most influential money-management and market-making firms the world has ever seen.
There was no single trade that made Citadel what it is; it was millions and millions of small trades in which they had a real edge. Griffin didn't set out to prove a point or oppress the masses. He simply rooted out all of the profit opportunities he could and capitalized on them.
Most successful fund managers won't risk more than 5% of AUM on a single trade. There's no "all-in" button on their trading terminals. 5% is what they throw at the ideas they're most sure about! The lay-ups might get 5% -- everything else gets much less.
This morning I made a spreadsheet to illustrate how much money a 25 year-old investor might amass in an ordinary tax-advantaged retirement account like an IRA or 401K. Assume that a young investor started participating in the markets at the beginning of 2020, putting $500 per bi-monthly paycheck into a retirement account and buying a mutual fund or ETF that mirrors the S&P 500.
At the end of the year, that person would have contributed a total of $12,000. On December 31st, the account value would have grown to $14,191, plus $163 in cash dividends. That $14,353 represents a 19.6% return on the investment. That's a sensational return.
If you're saying to yourself, "Sure it's a great percentage return, but who cares about 2,300 bucks? My rent is more than that," read on...
Let's say that our trader stopped investing altogether right now and simply let the balance grow until she retired at age 65. Assuming the long-term average return of the S&P of about 8%/year and another 2% in cash dividends, that account will have grown to $688,493.
If she instead continued to contribute the same $500/check over the course of the next 39 years and realized that same 8% + 2% return, that retirement account would be worth more than $5.8 million dollars. Plus she didn't pay a dime in taxes on those gains and gets to decide how she wants to withdraw the proceeds to maximize tax savings.
Keep in mind that having a stable plan for building wealth over decades doesn't preclude you from participating in the financial markets in a more speculative way if and when you can afford it. I truly believe that well-informed investors can (and do) make excess returns by carefully picking stocks as well as executing a sensible options strategy to mitigate risk and add income.
You're already here, so I'm probably preaching to the choir, but imagine the wealth that could be generated if you combined targeted investments in stocks with a Zacks Rank #1 (Strong Buy) with the passive index strategy above.
When you look around and see people who seem to have much greater wealth than you do, there's an excellent chance that they've been availing themselves of the opportunity to reap the rewards of compound wealth building in the financial markets over a long period of time.
There might be a handful that have had one lucky break and a single great trade, but they'll be the very rare exception rather than the rule. There will also be some people who won a lottery jackpot, but that certainly shouldn't encourage you to buy lottery tickets.
It's a well-worn story in the financial markets that traders who make everything they have on a single trade almost always give it all back – and sometimes much more – as they chase additional profits and simultaneously discount the role that luck played in their windfall.
I don't have much of an opinion on the social justice aspect of the GameStop trade. As an observer of market dynamics behavior, I find the whole episode fascinating and I truly don't care who ultimately "wins." (Though I do hope that the episode doesn't sour any investors on the concept of owning equities in general.)
I don't have a dog in this fight because my focus is primarily on finding profit opportunities for myself and for those investors who find my knowledge and advice valuable. If you want to try to trade GameStop stock or options – or any of the other heavily shorted stocks that have also become popular on the internet forums – go ahead, but please be careful and risk only what you can afford to lose.
Most importantly, don't let the insane volatility cause you to take your eyes off of the prize. Lean on the concept of sensible, long-term investing to achieve your financial goals.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana. Ignited by referendums and legislation, this industry is expected to blast from an already robust $17.7 billion in 2019 to a staggering $73.6 billion by 2027. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
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Goldman Sachs, Chico's, GameStop, Chewy and Apple highlighted as Zacks Bull and Bear of the Day
For Immediate Release
Chicago, IL – January 29, 2021 – Zacks Equity Research Shares of The Goldman Sachs Group, Inc. (GS - Free Report) as the Bull of the Day, Chico's FAS, Inc. as the Bear of the Day. In addition, Zacks Equity Research provides analysis on GameStop Corp. (GME - Free Report) , Chewy, Inc. (CHWY - Free Report) and Apple Inc. (AAPL - Free Report) .
Here is a synopsis of all five stocks:
Bull of the Day:
Goldman Sachs is a captain of high finance and the banking sector's knight in shining armor. The firm is known for its quick trading action and best-in-class deal-making investment bank. GS has soared 45%, hitting all-time highs, since Biden was elected President on November 3rd. The shares have been met with a recent pullback that represents an excellent buying opportunity.
Volatility is coming back into the market and I have no doubt that Goldman's best-in-class trading & sales team are taking full advantage. The $275 per share that GS is trading at today represents a robust purchase price for a long-term investment in the gold-standard of high finance. GS bounced off my highest Fibonacci retracement just south of $310 and are coming back down to a strong resistance level north of $260, where the 261.8% retracement and 50-day moving average are approaching convergence.
The economic downturn and proceeding recovery have been an unexpected tailwind for Goldman, driving the business to record profitability the past 2 quarters, with a robust double-digit topline expansion. Due to Goldman's trading and deal-making profit drivers, the bank didn't see the same margin-pinches from the ultra-low interest rates that commercial banks like JPMorgan and Bank of America did.
GS is expected to continue pushing growth and profitability as a slew of big deals and market action extends into 2021. Analysts have been increasingly optimistic about GS following its record earnings on Tuesday, pushing its EPS estimates on every time horizon and propelling the stock into a Zacks Rank #1 (Strong Buy).
Recent Earnings
The firm illustrated unbelievable results in the wake of economic uncertainty, taking advantage of new market opportunities. GS reported record-breaking earnings of $12.08 per share, demonstrating 158% year-over-year growth, and blew Zacks Consensus estimates out of the water by over 72%. Its sales were quite strong as well, showing $11.74 billion, up 18% from the same quarter last year, beating estimates by 22%.
Equity trading and its deal-making investment banking (IB) segment were the two largest growth drivers for this best-in-class investment bank. Goldman's investment banking sector was up 24% in 2020 compared to 2019, and this segment looks like it's just heating up with Q4 IB earnings up 33% from Q3 and 27% year-over-year. Its equities-underwriting portion of IB was booming in 2020 as a record number of businesses hit the public exchanges.
454 companies IPO'd in 2020, raising over $167 billion, far surpassing the previous record made in 1999 amid the dot-com mania. Goldman was an enormous beneficiary of this push to the public markets. The firm drove over $3.4 billion last year from equity underwriting alone, up 130% from 2019. It looks like this subsegment is only beginning to simmer, with this past quarter generating $1.12 billion, up 195% year-over-year and 30% quarter-over-quarter.
GS's global markets division was its biggest topline driver as the business strategically navigated the choppy market waters and drove this segment's revenue up 43% to a record $21.16 billion, 47% of its total topline in 2020. Equities sales & trading at Goldman appear to be still riding a tailwind as the stock market surges to seemingly no end. This group is up 16% quarter-over-quarter.
What's Next For GS?
David Solomon is proving himself at the helm of this remarkable firm. Since Solomon was named CEO and Chairman of Goldman Sachs on October 1st, 2018, GS shares are up over 22.4%. This may not sound like a lot, but GS has navigated the 2018 year-end sell-off and the most significant economic contraction in over a decade. GS is sizably outperforming its cohorts JPM and BAC, who have only returned 15.4% and 2.7%, respectively.
Investors & traders pulled profits from all the major banks following earnings over the past few weeks. GS was no expectation as its share price dipped from an all-time high of $309.41 down to the $275 we are trading at today. This has created a tremendous buying opportunity, with 10 out 14 analysts calling GS a strong buy today.
Price targets have risen across the board following the record quarter results on January 19th. The most optimistic are north of $445 a share, representing a 62% upside and even the more conservative recent estimates represent sizable double-digit returns. The large upside potential combined with the firm's nearly 2% dividend yield makes GS a strong long-term buy and hold today.
I remain a GS buyer despite the run it has already had since the March lows. This company is adaptable and resourceful, and no matter what the economy throws at it, GS comes out on top.
Bear of the Day:
Chico's participated in the recent brick-and-mortar retail rally driven by speculative retail traders from a Reddit message board called WallStreetBets. This cohort of Gen Zs and Millennials targeted some of the most shorted stocks on the market and were followed in by hedge funds and prop trading firms that propagated a historic short-squeeze, which seems to have moved a number failing business amid the retail apocalypse, which included CHS.
This stock is trading above the most optimistic price targets and I would liquidate any positions that I had in CHS, thanking god that I was able to get such a good price for them. I would recommend not taking on any position in this company.
Retail Apocalypse
The retail apocalypse is exploding amid this global pandemic, and no brick-and-mortar business is safe. Chico's is one such business that has not been immune to the COVID driven economic downturn. CHS has lost 78% of its value in the past 5 years, and it continues to disappoint investors with a 45% breakdown so far this year. Sell-side analysts are becoming more pessimistic about this stock and continue to lower expectations pushing this stock down to a Zacks Rank #5 (Strong Sell).
The Business
Chico's is a women's fashion brand that began out of Sanibel, Florida 36 years ago. The company operates three separate retailers, branded Chico's, White House Black Market, and Soma.
The peak of this retailer's performance was back in 2014 but has since fallen prey to the changing digital commerce landscape. Amazon and the other large online retailers have left less versatile firms like Chico's in the dust. Chico's operated 1,547 stores in 2014 and has since closed 129 stores and expects to close another 250 over the next three years.
This once women's fashion icon's inability to adapt to the digitalizing world has led to a sales decline in the past 19 out of 20 quarters and shareholders have suffered. Chico's revenue decline is expected to continue in the years to come.
Chico's bottom line has flipped negative, and its losses are accelerating seemingly every quarter. The business is quickly running out money, and this pandemic may be the straw that broke the camel's back for Chico's.
The best thing that could happen to Chico's at this point is an acquisition. Otherwise, I see this archaic enterprise fizzling into bankruptcy, and that is what investors & traders have
CHS is soon to be a penny stock trading at $2.25. This low share price causes accentuated volatility, adding more risk to any investor holding these shares.
Take Away
The retail apocalypse is real, and the COVID-crisis is pushing brick-and-mortar retailers that haven't adapted to the evolving consumer out of the market. Chico's is just another teetering retail domino getting ready to fall. There are significant systemic issues with this company, and I would not put any position on this stock at this time.
Additional content:
Some Advice for the GameStop (GME - Free Report) "Rebellion"
The story of the meteoric rise of the shares of GameStop is actually a number of stories. It started as an informal group of traders communicating in online message boards – most notably Reddit's Wallstreetbets/ forum – and trading in unison. Those traders collectively determined that shares of GameStop had such high short interest that if they began buying those shares and call options in a coordinated manner, they would force the funds who held short positions to cover their positions at higher prices.
It was a fairly classic "short-squeeze" and it worked.
GameStop started 2021 trading at $17.25/share. By January 15th, it had exactly doubled to $35.50/share after the news that week that Chewy founder Ryan Cohen had amassed a nearly 13% stake in the company and would be joining the board of directors - ostensibly to guide the company's transition from strip mall brick-and-mortar retailer to online presence.
It was a "comeback" story.
On Friday January 22nd, GameStop closed at $65/share and the short squeeze had become a rout, inflicting severe losses on at least two well-known, short-selling hedge funds.
That's also when even more stories began to develop. It was no longer simply about exploiting an inefficiency and making a profit from it. The tone of the online messages among the GameStop faithful shifted significantly toward enthusiasm about inflicting pain on hedge funds and other professional investors.
"Little Guys Take on the Big Guys and Win!" Is an easy headline to love. So are stories about people using profits from the trade to pay health care bills or pay off student loans. The "steal from the rich and give to the poor" aspect of the trade added to its popular appeal.
The threats of violence against opposing traders and journalists makes the feel-good story feel considerably less good.
The desire to make money by risking your capital in the markets and having your thesis proven correct is not only understandable, it's necessary. The role of speculators (including short-sellers) is fundamental to the healthy functioning of financial markets.
In addition, many of the Wallstreetbets traders have expressed the notion that they don't care if they lose money, as long as they have caused pain to the Wall Street "elite." They're trading to express their anger rather than amass profit. That's ridiculous.
(What's also ridiculous is that last night, Apple reported the results of a very successful quarter that included $111 billion in revenues and almost no one is paying attention. The worst part about the GameStop episode for those who have no interest in participating may be the distraction it's causing.)
Here's my advice:
The best traders want to make the most money possible while taking the least risk possible.
Period.
Trying to exact revenge from the faceless counterparties that you believe have somehow wronged you in the past is an inefficient endeavor -- and one that's very likely to end up with you losing money. It's human nature to engage in Schadenfreude from time to time, but it's a fundamentally non-constructive activity. Trading with the objective of hurting another market participant interferes with your own objectivity.
Your goal should not be to "beat the market" or to beat any specific party, it should be to put as much cash as possible in your own pocket. If you see an opportunity to squeeze someone else who puts themself in a disadvantaged position, by all means take it. Those are the situations that great trades are made of. But do it because you see the opportunity to be disproportionately rewarded for the risk you take. Do it because you want the money. Don't do it because you "hate" the other guys or are jealous of their previous success.
One of the great trades of our time was George Soros versus the Bank of England in 1992. (If you don't know the story, look it up – it's fascinating.) In a nutshell, Soros correctly surmised that Great Britain didn't have the resources to continue supporting the Pound and he successfully shorted it and made over a billion dollars in the process.
Soros didn't hate England. He didn't want to "stick it to them" or intentionally cause harm to British Central Bankers or ordinary citizens.
He just wanted the money!
There's another aspect to the GameStop trade that I'd like to address. It's the concept of patience in investing. I fully understand that when you're 25 years old, you want to get wealthy now. Making a huge score on a single trade is an extremely attractive concept. Unfortunately, it's also not very realistic.
Ken Griffin of Citadel was just like you once. Citadel was literally founded in a college dormitory room. Griffin recognized that the market often wasn't correctly pricing convertible debt efficiently and that he could make small but consistent arbitrage profits by trading mispriced convertibles against plain-vanilla bonds and listed options. He built on his early successes and eventually built one of the most influential money-management and market-making firms the world has ever seen.
There was no single trade that made Citadel what it is; it was millions and millions of small trades in which they had a real edge. Griffin didn't set out to prove a point or oppress the masses. He simply rooted out all of the profit opportunities he could and capitalized on them.
Most successful fund managers won't risk more than 5% of AUM on a single trade. There's no "all-in" button on their trading terminals. 5% is what they throw at the ideas they're most sure about! The lay-ups might get 5% -- everything else gets much less.
This morning I made a spreadsheet to illustrate how much money a 25 year-old investor might amass in an ordinary tax-advantaged retirement account like an IRA or 401K. Assume that a young investor started participating in the markets at the beginning of 2020, putting $500 per bi-monthly paycheck into a retirement account and buying a mutual fund or ETF that mirrors the S&P 500.
At the end of the year, that person would have contributed a total of $12,000. On December 31st, the account value would have grown to $14,191, plus $163 in cash dividends. That $14,353 represents a 19.6% return on the investment. That's a sensational return.
If you're saying to yourself, "Sure it's a great percentage return, but who cares about 2,300 bucks? My rent is more than that," read on...
Let's say that our trader stopped investing altogether right now and simply let the balance grow until she retired at age 65. Assuming the long-term average return of the S&P of about 8%/year and another 2% in cash dividends, that account will have grown to $688,493.
If she instead continued to contribute the same $500/check over the course of the next 39 years and realized that same 8% + 2% return, that retirement account would be worth more than $5.8 million dollars. Plus she didn't pay a dime in taxes on those gains and gets to decide how she wants to withdraw the proceeds to maximize tax savings.
Keep in mind that having a stable plan for building wealth over decades doesn't preclude you from participating in the financial markets in a more speculative way if and when you can afford it. I truly believe that well-informed investors can (and do) make excess returns by carefully picking stocks as well as executing a sensible options strategy to mitigate risk and add income.
You're already here, so I'm probably preaching to the choir, but imagine the wealth that could be generated if you combined targeted investments in stocks with a Zacks Rank #1 (Strong Buy) with the passive index strategy above.
When you look around and see people who seem to have much greater wealth than you do, there's an excellent chance that they've been availing themselves of the opportunity to reap the rewards of compound wealth building in the financial markets over a long period of time.
There might be a handful that have had one lucky break and a single great trade, but they'll be the very rare exception rather than the rule. There will also be some people who won a lottery jackpot, but that certainly shouldn't encourage you to buy lottery tickets.
It's a well-worn story in the financial markets that traders who make everything they have on a single trade almost always give it all back – and sometimes much more – as they chase additional profits and simultaneously discount the role that luck played in their windfall.
I don't have much of an opinion on the social justice aspect of the GameStop trade. As an observer of market dynamics behavior, I find the whole episode fascinating and I truly don't care who ultimately "wins." (Though I do hope that the episode doesn't sour any investors on the concept of owning equities in general.)
I don't have a dog in this fight because my focus is primarily on finding profit opportunities for myself and for those investors who find my knowledge and advice valuable. If you want to try to trade GameStop stock or options – or any of the other heavily shorted stocks that have also become popular on the internet forums – go ahead, but please be careful and risk only what you can afford to lose.
Most importantly, don't let the insane volatility cause you to take your eyes off of the prize. Lean on the concept of sensible, long-term investing to achieve your financial goals.
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