U.S. stock futures pointed to a lower open, with losses accelerating after the government released higher than expected initial jobless claims. The FIRE movement is a ‘motivational platform’ to get people thinking about their future financial stability, he says Tesla´s recent stock split underlines the importance of not letting psychological viruses affect your investment decisions.
The Nasdaq was the big loser Wednesday, plunging 3% and going back into a correction, down nearly 12% from its Sept. 2 record highs. The Dow and S&P 500 were hovering just above the correction threshold, defined by a drop of 10% or more from recent highs.
Shares of Apple, a Dow component and a major broader market influencer, sank nearly 4.2% on Wednesday and were under modest pressure in Thursday’s premarket trading. Apple has entered a bear market, down more than 20% from its Sept. 1 all-time high close.
Federal Reserve Chairman Jerome Powell wraps up his third straight day on Capitol Hill, appearing Thursday morning along with Treasury Secretary Steven Mnuchin before the Senate Banking Committee for an update on the $2.2 trillion March coronavirus relief package. Powell has been telling lawmakers this week that the Fed stands ready to keep supporting the economy with monetary policy but Capitol Hill needs to do its part on the fiscal side.
About 90 minutes before Powell’s scheduled 10 a.m. ET Senate appearance, the Labor Department released jobless claims figures, which showed 870,000 initial filings for unemployment benefits for the week ending Sept. 19.
That was higher than expected and higher than the prior week. New claims, which hit a peak of 6.9 million in late March as the economy shut down to try to slow the spread of Covid-19, were running above 1 million per week through late August.
US President Donald Trump arrives for a press conference in the Brady Briefing Room of the White House on September 23, 2020, in Washington, DC.
Mandal Ngan | AFP | Getty Images
President Donald Trump on Wednesday refused to commit to a peaceful transition of power if he were to lose the 2020 election to Democratic nominee Joe Biden. Trump said that if mail-in ballots weren’t used, “you’ll have a very peaceful; there won’t be a transfer, frankly, there’ll be a continuation.” Without evidence, Trump has condemned voting by mail as prone to fraud.
Earlier Wednesday, the president said he believes the election will “end up in the Supreme Court,” which if his pick to replace late liberal Justice Ruth Bader Ginsburg were seated before the election, the high court would have six conservative justices and three liberals.
Medical technicians work at a drive-through coronavirus disease (COVID-19) testing facility at the Regeneron Pharmaceuticals company’s Westchester campus in Tarrytown, New York, September 17, 2020.
Brendan McDermid | Reuters
The U.S. had more than 37,300 new cases of Covid-19 on Wednesday, down from Monday’s nearly one month high of 52,000. New deaths of nearly 1,100 on Wednesday marked the first day with over 1,000 fatalities since Sept. 15. At a Senate hearing Wednesday, CDC Director Dr. Robert Redfield said, “A majority of our nation, more than 90% of the population, remains susceptible” to the coronavirus. White House coronavirus advisor Dr. Anthony Fauci said Wednesday, at a different Senate hearing, that the U.S. could have enough Covid-19 vaccine doses for every American by April.
Scarlett Johansson stars as Natasha Romanoff, AKA Black Widow, in Marvel’s “Black Widow.”
Disney | Marvel
Shares of Dow component Walt Disney, relatively steady in the premarket, lost 3% on Wednesday after the company moved a number of its movies to later this year and into 2021 as Americans continue to avoid indoor movie theaters during the pandemic. The much-anticipated Marvel blockbuster “Black Widow” was postponed six months to May. “West Side Story” was moved back a year to December 2021.
Shares of AMC Entertainment and other movie-theater stocks were hard hit by the postponement of “Black Widow.” Many theater companies had been counting on the superhero movie to coax more people back. While theaters largely reopened in late August, box office sales in the U.S. have been dismal.
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Author: Matthew J. Belvedere
Kevin O’ Leary says investing $100 a week will make you a millionaire by retirement
Some people plan for retirement over the course of their careers, while others wait to think about that next stage of their lives when it gets closer. Not all Americans save adequately for their old age, partially because they can’t afford to do so or because they have other, more present-day financial obligations, such as student loans, child care and high costs of living, to worry about.
Still, there’s a portion of the population, albeit small, that pursues retirement early — in some cases, by the time they’re in their 30s or 40s. They do so by living frugally and dedicating most of their income to the stock market. This movement is known as FIRE, short for “financial independence, retire early.” O’Leary, founder of the O’Leary Financial Group, originally spoke about the FIRE movement with Grant Sabatier, an early retiree and host of the Millennial Money podcast, where they also discussed the skills it takes to achieve such a feat.
The “Shark Tank” host, known as Mr. Wonderful on the show, spoke with MarketWatch about how feasible saving for retirement is for most Americans, how they can become millionaires by the time they retire and why Americans need to take the concept of financial independence so seriously. This interview was edited for clarity and length.
See: A recession won’t end the FIRE movement, but it will change it for the better
MarketWatch: What were your first thoughts about the FIRE movement and how feasible do you think it is for most Americans?
Kevin O’Leary: It is a very strong, motivational platform. I like the idea of it. The old idea of retiring at 65 or even 60, or 62 — those targets don’t even make sense anymore. The economy has changed so much and a lot of people didn’t start saving soon enough.
I make the point that the pandemic has exposed one of those classic “king has no clothes on” situations. When I was doing PPP [Paycheck Protection Program] loans with the companies I’m an investor of, I discovered a majority of them did not have anything saved or even invested for retirement. Some of these people are in their late 20s, some in their late 30s, some in their late 40s. That exposed a big problem to me and the more I dug into it, I found out more than 100 million Americans don’t even have any investment accounts. That’s over a third of the population who don’t have anything saved for retirement. So I like the idea of focusing on retirement because it is a wake-up call. But the truth is, when you come to that point in your life, a majority of the people don’t have enough to retire on, given how low interest rates are for savings accounts and they haven’t invested in the markets properly over their entire career. I founded a new app to help solve this problem, I’m the chairman of it — it’s called Beanstox — and it helps people pull small amounts of capital into a portfolio that invests for them over the next 20, 30, 40 years.
MW: You work with a lot of small-business owners, many of whom have been impacted by this pandemic. How can people, especially entrepreneurs and small-business owners, manage keeping their livelihood afloat but also think about their futures and future savings?
O’Leary: I’ve learned over the years working with all kinds of people — business owners, entrepreneurs, my own employees — that there’s a very simple tactic you can take in your life that determines whether or not you’re going to be OK when you retire. I call it the 90-day test. It is very simple, and doesn’t even require any technology. Look at everything you bring in, it could be a side hustle, a salary. All of the income, every single dime of it. Then you do the same thing for expenses. What you’ll find is many people are living above their means, and they’re spending more in a 90-day period than they’re taking in. Where you find it manifested is credit card debt, which is being charged at 18-21%. It puts people in a horrible place. You’re losing your net worth every year doing this.
The way you change it is so simple. Most people buy stuff they don’t need. So I say everybody can reduce their cash out by about 15%, minimum. It is very simple to do. You just look at the thing you’re going to buy and ask “do I need this or should I take this money and invest it?” There are so many different apps that do this. I created one because I couldn’t find what I wanted. I’m not asking people to become stock pickers and technicians and day traders or to round up their credit card purchases. I am telling people, you can find a way to save $100 a week and invest it. One hundred bucks a week. There’s some crap you don’t need to buy that equals $100 and if you do that and start in your early 20s, you’ll end up with $1.5 million in retirement. That’s my mission, that’s my goal.
MW: Along with investing apps, what are some other ways Americans can better prepare for their futures?
O’Leary: I’m a big investor in the wedding industry. I have many companies that service weddings. Honeyfund is one of my companies and we do wedding registries, and we also have the data for years and years. You’ll find that most marriages fail, most unions fail, within seven years. Fifty percent of the time it has nothing to do with infidelity. It has to do with financial stress. One partner outspends the other, they don’t have a financial plan, they don’t have a goal. Getting married is so euphoric, it is a wonderful thing and I totally endorse it, but you are building a business relationship in the sense you’re going to be taking on obligations. You may buy a home, have children. These things are financial stresses and they need a plan for it. These are the things that are so mundane but when you actually go forward 10, 20 years, you figure if you have a plan you end up in a better place.
When I talk to people who are planning their lives, I tell them money sits at the table with you and your family every day. I wrote three books on this, all bestsellers, but they all deal with the same problems over and over again. The basic lessons go right through to investing, having money set aside and not spending on things you don’t need. It’s a huge problem in America.
I used to be in the education market for years. We teach geography, math, reading and everything else, but nothing on financial literacy. It’s crazy.
MW: A lot of people in their 20s and 30s might not want to retire too early but they have a savings number in mind that would give them financial independence. How important is it to achieve financial independence and what does that mean for you?
O’Leary: It means that at the back-end of your life, you have the freedom to pursue the things that matter to you, whether that’s family, children, travel or hobbies that are important to you. The whole idea of wealth is happiness. I try to tell people, look, if you don’t want tremendous stress in life, because a lot of stress can be unhealthy, you have to have a plan that allows you to have a lifestyle you want to have when you’re past 60 years old. Now what matters to people is: their health, their ability to see their children, if they have them, or their family, the ability to travel. The pandemic has squashed that for a while but we have to make an assumption that in six months from this, things are somewhat normalized.
You have to start thinking about what you can get from investing. The market provides on average 6-8% on an annual basis over a long period of time, so you have to start thinking, OK, can I live off of 6% of my portfolio, and after it pays 2% in taxes a distribution of 4%. You’re going to find you really want to get to $750,000 to $1.5 million invested, so that you can live off of that. The average salary in America is $58,000, and if you work backward, you can save $100 a week. You can put that money in the market, and buy an indexed or exchange-traded fund.
Also see: These early retirees saw their investments plunge more than $200,000 — but stoll manage to stay calm
MW: How do you think we as a society can do better to help Americans achieve greater financial literacy?
O’Leary: Number 1: Education. Number 2: Making investing really easy and that is one of my mandates for myself in 2021-2022. I’m crisscrossing the country and doing all kinds of virtual educational events. I developed the app because I learned how hard it is. With it, you can put $100 aside, and build a diversified portfolio. When I first started this journey in financial literacy, I made the assumption people know how to buy stocks and bonds but of course they don’t, we don’t teach them that.
MW: Do you think there are any major misconceptions that keep people away from investing?
O’Leary: There’s this idea of daytrading that has become very popular, which to me is a speculative gamble really. That is not investing.
MW: Was there a time you can remember when you felt you had achieved financial independence?
O’Leary: I was very fortunate. One of my companies was a huge success. It started in a garage and we sold the Learning Company for $4.2 billion. All the founders overnight had this big liquidity event. I tried to retire for three years. I had this strategy, I wanted to see every beach on Earth. It was one of the things I wanted to do. To see these amazing beaches — in Cyprus, Cambodia, Vietnam and Europe. I did them all and I was bored out of my mind. This isn’t life, this sucks. It was going from one place to another and saying I hit this beach. So I have seen every beach on Earth, every beach that’s famous, but to me that is not an achievement at all. Now I work harder than ever on the things that matter to me.
You have to find out what you want with your life, what makes you happy, and how you want to burn your hours of the day. I really enjoy what I do and the only reason I can do it is because I have financial freedom. I achieved it because I worked for it, but retirement doesn’t work for me.
MW: In your experience, how have you seen the concept of retirement change and what do you think is most important for people to know when it comes to pursuing some sort of retirement security for themselves?
O’Leary: Retirement isn’t what it used to be in the ‘60s, ‘70s and ‘80s. Retirement now is a change in how you spend your day. That’s all. It’s just a change in how you spend your time and a change in what you pursue. If you elect to pursue something that doesn’t have income associated with it, you need to accumulate enough money in an investment account so it can pay you.
Author: Alessandra Malito
What The Tesla Stock Price Tells Us About Market Irrationality
By Nuno Fernandes, Full Professor of Finance at IESE Business School and the author of Finance for Executives: A Practical Guide for Managers.
On August 11, 2020, at the end of the New York trading day, the automaker Tesla announced it would be splitting its common stock 5- for-1, meaning that an investor in Tesla would receive five new shares for each one she already owns.
Tesla’s latest move can be thought of in relation to diets and basic nutrition. Which contains more calories: a whole pizza cut into four slices or eight?
Like a pizza maker, stock splits divide the same pie into thinner slices, and thus should not be linked to changes in share prices.
Tesla’s was an interesting experiment. Immediately following the company’s August announcement, the share price rose more than 6% during after-hours trading. It jumped another 20% over the following two days, increasing Tesla’s market capitalization by almost $50 billion.
What are stock splits?
For at least a half-century, it’s been understood that stock splits convey no fundamental economic information and should not impact firm value. They either slice the pie into smaller parts or merely change the unit of account. After the execution of the split, Tesla would simply have five times more nominal shares than it previously did. Obviously, having more nominal shares does not connote selling more cars or operating more efficient battery plants. As the number of shares rises, all per-share magnitudes (like earnings or dividends per share) fall by the exact same fraction.
As Wall Street closed on August 11, Tesla had 20 million shares valued at $1,370 a piece, or a market capitalization of $256 billion. To put the subsequent two-day surge in perspective, consider that the $50 billion change in market cap exceeds the total market value of companies including General Motors, Dow Chemical, Telefónica, Japan Tobacco, Eon, Airbus and Shiseido. And it continued to soar through the end of August, when it passed the $2,200 per share mark for a market capitalization above $400 billion.
What is the impact of stock splits?
Some market experts contend that stock splits have a positive effect on stock liquidity. One of the most common arguments for this is that there’s an optimal trading range for investors that stock splits help companies reach. There was some merit to this hypothesis when, fifty years ago, more than 80% of stock market participants were individual investors.
Nowadays, we live in a very different world. Institutional investors that own and trade well beyond 50% of a company’s shares dominate the markets worldwide. Why should these investors, which include pension funds, manage billions of dollars influence by a cosmetic change to the size of the pizza slice? The bulk of recent research backs this up by showing that the liquidity improvement of stock splits is modest and short-lived. Indeed, after a split is executed, liquidity typically returns to levels before the split was announced.
“Signalling” is another concept used in defense of stock splits having a substantial impact on prices. According to this theory, managers split stocks in order to grab investors’ attention. With the stock split, managers signal that company earnings will continue to grow as overall performance improves. Once again, when we put this theory to the test of real data , it’s results prove fleeting.
Tesla follow on equity raising announcement
Tesla’s stock split was executed on August 31st. The next day, the company announced a $5 billion capital raising program at market prices. On September 8, Tesla announced it had completed the sale of $5 billion of its common stock through its at-market-rate offering program. Interesting….
Why would a company with such a huge market value, almost no leverage, and several billion in cash, need to sell additional stock? Could it be because owners and management are themselves amazed, believe the stock is overvalued, and want to cash in while they can?
What this suggests
Stock splits are cosmetic maneuvers that increase the number of outstanding shares without affecting a company’s sales, profits, or cash flows.
The Tesla episode makes clear the brief lift investor psychology can give to share prices. What’s good news for Elon Musk and Tesla—more capital raised—may not benefit shareholders. The Tesla move also signals an irrational exuberance in the market. Usually, companies with a Price-Earnings ratio of 970x do not deliver great returns in the long run… But Tesla’s exuberant valuation is just one example of this dubious phenomenon.
Instead of again saying, “this time is different…” investors should watch out for their own psychological biases and behaviors. Irrational exuberance has cost investors dearly in the past. Recall that toward the end of the nineties tech bubble, researchers found there was a 74% abnormal return after companies merely announced a renaming to reflect the dotcom boom. (The Pets.com example.)
We know full well how far the dotcom halo fell. As we now find ourselves in a world consumed by a pandemic, don’t let psychological viruses affect your investment decisions.
Author: IESE Business School