In episode 5, Brandon and Christine talk about the danger of treating the stock market like a game, as some retail investors have been doing lately. It can unfortunately have catastrophic consequences.
03:49 – Market Overview
- The market dropped by the end of the day Friday.
- Futures opened red Sunday night, but the market has been mixed during market hours today.
- Brandon thinks it’ll be a negative week this week.
- His portfolio is slightly delta negative.
- There were 30,000 new cases of the coronavirus over the weekend.
- Arizona experienced an all-time high in reported cases in a single day (source).
- European stocks were down about 1% today, but US stocks have been mixed.
09:34 – Weekly Stock Picks
- The weekly stock pick is Smith & Wesson Brands Inc (SWBI), which is in the manufacture and sale of guns.
- SWBI has grown 148% in the last 12 weeks, and 71.18% in the last 4 weeks.
- It has a price/sales of 1.44, and a forward P/E of 10.
- Its projected EPS growth for the year is 115.85%.
- Brandon bought SWBI at $18.13.
- 14:53 – Christine asks what a momentum stock is.
- Stocks can generally be divided into 4 types: value, growth, momentum, and income.
- Value stocks are those stocks with attractive fundamentals, such as price/sales, price/earnings, etc.
- Growth stocks are those stocks whose earnings and sales growth are anticipated to outperform the market average.
- Momentum stocks are those stocks which have a strong uptrend and are hoped to continue in a positive direction.
- Income stocks are those stocks which offer attractive dividends.
- 17:54 – The earnings pick for the week is Unifirst Corp. (UNF), whose business is the rental Lease and Sale of work clothing, uniforms, protective apparel, careerwear, and facility service products.
- The analyst consensus is $1.17 per share, but it’s expected to beat earnings by up to 18.46% at $1.38 per share.
- Their last earnings surprise was 9.64%.
- Brandon bought UNF at $169.95.
21:12 – Investing Is Not a Game
- 22:10 – For beginner investors, it can be easy to be sucked in by the appeal of big wins, similar to winning big at a casino.
- Beginner investors might experience a big win, and think they can repeat it reliably. However, this is an unreasonable expectation.
- The real test is in a market correction, how will your strategy perform? Will you live to trade another day?
- 26:34 – On June 12, a 20-year-old kid in Illinois committed suicide after believing he was negative $730,000 in his Robinhood account (source).
- He got assigned on a put option, but the shares of the assigned stock had not yet settled, so it looked like his account was negative.
- 29:13 – It was originally misreported that Robinhood extended him $700,000 of margin, which is incorrect.
- Borrowed funds cannot be used when trading options. Even if it could, you can only ever borrow the equivalent to your cash balance.
- 31:24 – He opened a bull put spread, which is when you sell a put at a higher strike, and buy an offsetting put at a lower strike.
- Bull put spreads are a defined risk strategy, which means you have a maximum loss limited by the difference between the two strikes.
- If the stock closes above both strikes at expiration, they both expire worthless and the option seller keeps the premium received.
- If the stock closes below both strikes, then the sold (or short) put option is assigned, but the bought (or long) put option is used to sell the assigned shares automatically.
- But if the stock closes between the two strikes, then the long put option expires worthless, but the short put option is still assigned.
- The result is that you are obligated to pay for 100 shares of the underlying stock (per contract), but they are not automatically sold by any offsetting put.
- However, it is easy enough to fix, simply by selling the shares at the current market rate when the market next opens.
- Robinhood did nothing wrong: the mechanics of the trade would have been equivalent on any broker.
- The only fault Robinhood might have is that their interface gamifies the investing experience, making beginner investors take it less seriously.
- 41:22 – People need to educate themselves. If you misuse a gun, you don’t blame the manufacturer or seller of the gun: you blame the user of the gun.
- Someone recently asked in a Facebook group whether Shopify Inc - Class A (SHOP) was a good buy.
- Brandon answered, saying they had a P/E of 1,600, but several people didn’t know what that meant or why that was not a good value.
- Investors need to know what fundamentals like P/E, P/S, etc, are and what they mean.
- A good P/E is under 15 or 20 for value stocks, or a bit higher for growth stocks.
- Even Apple Inc (AAPL), which is at its all-time high, has a forward P/E of just 28.39.
- 48:21 – Robinhood investors are also buying up penny stocks, even if those stocks are bankrupt.
- The most recent example is Hertz Global Holdings, Inc. (HTZ), which was trading under $1, was bought up to over $5, and has now fallen to under $2.
- In fact, HTZ thought to profit off of this insanity and wanted to sell $1 billion in stock, but while a judge approved this move, the SEC stepped in to stop it (source). Note: It was misreported in the podcast as “1 billion shares”, but is $1 billion in shares.
- These beginner investors think there is nothing to lose, and at the moment it seems to be working, but in the end it will bite them back.
- 51:34 – Make sure you educate yourself before jumping into this. Even if you want to learn as you go, start small and take it slowly.
- Set reasonable goals. You are not going to double your account consistently in a short period of time (see episode 2).
- Just because you’re doing well right now, doesn’t mean you’ll continue to do well.
- When you first get into options, big returns seem like the norm. But in time you will learn that a reasonable, consistent return is far lower than expected.
- Even with options, a reasonable return is maybe 50-60% per year, if that.
- 55:43 – My advice is to not set a target percent.
- Instead, keep a record of your day-to-day portfolio balance.
- Then see what your actual performance is — per week, per month, per quarter, per year.
- Just because you’ve been getting good returns for a month or two, does not mean you can extend that to an entire year.
- In the meantime, educate yourself: learn the fundamentals of stocks and options.
- This is serious business; this is serious money; you can stand to make a lot, and you can stand to lose a lot.
[spp-tweet tweet=”Everyone looks like a genius in a bull market.”/]
[spp-tweet tweet=”Just because you’re doing well right now, doesn’t mean you’ll continue to do well.”/]
[spp-tweet tweet=”This is serious business; this is serious money; you can stand to make a lot, and you can stand to lose a lot.”/]