The Millennial Generation has it all Wrong When it Comes to Investing
Tuesday, September 29th, 2015
The millennial generation is missing out on the easiest way to make money. Investing in the stock market has proven to be the best way for individuals to grow their wealth over time, but many that are a part of the younger generation have been scared away due to the tragic events that have occurred over the past 20 years.
During this time period we have witnessed the tech boom and bust, the terror attacks of 9/11, and the Great Recession. These events have left the younger investor much more skeptical of the stock market.
In a recent survey conducted by Bankrate.com, only 26% of Americans under the age of 30 are investing in the stock market.
Looking at the facts, even with these horrible events, the S&P 500 has gained an average of 8.45% per year since 1995.
Many young investors think that they don’t have money to invest or they can just start saving in a few years. However, starting at a young age gives an investor the advantage of compounding and makes saving for retirement much easier.
If an investor invests $5,000 at the age of 25 and can grow that initial principle by an average of 8% per year; that initial investment will be worth $110,000 by the time they are age 65. Assuming that an investor waits 10 years to begin investing, they miss out on 10 years of compounding, which has a big impact on the final principle.
If an investor invests $5,000 at the age of 35 and the principle grows at an average of 8% per year; that initial investment will be worth $50,000 by the time the investor is age 65. By waiting just 10 years to invest, the investor has an opportunity cost of $60,000.
Those under the age of 30 that are investing in the stock market have been investing in all of the wrong names.
They have been investing in the exciting momentum stocks such as Tesla, GoPro, and Twitter; none of which trade on fundamentals but instead on the hype of what the company does. Hype cannot be evaluated and once the hype runs out the stocks will quickly fall.
Twitter and GoPro have both taken enormous hits over the past year. In late April of 2015 Twitter was trading at $51.66; the stock has now fallen to $27.43. That’s a decline of nearly 50% in a matter of a few months.
GoPro was trading at $93.85 in early October of 2014; the stock has now fallen to $33.07. That’s a fall of 65% in less than a year.
Both of these stocks quickly elevated from their IPOs based on the excitement, rather than the fundamentals of their business. They have both taken huge hits in their stock price due to the lessened hype surrounding their names.
Tesla has not experienced that fall in price, but the stock is not trading on the underlying fundamentals of the actual business.
The company currently has an income after-tax margin of -14%. Since the company is losing money, they do not have a P/E ratio. Price-to-sales is 8.87, which is higher than the industry average of 0.38. Current price-to-tangible book value for Tesla is 45.90, which is once again much higher than the industry average of 3.45.
These valuation ratios show investors that they are overpaying for all aspects of Tesla’s actual business. Tesla continues to be a momentum stock and, like GoPro and Twitter, when the hype fizzles out the stock price will quickly deflate from its elevated levels.
Many young investors seem to be looking for the next big thing that will make them rich tomorrow, instead of looking for high quality companies that will grow their wealth overtime. They have a misconception that they have a higher risk tolerance, so therefore can take chances on these high-flying companies.
By taking risks on the companies with high valuations, they risk losing their principle and missing out on the benefits of compounding.
To avoid risky investments, it is important for investors to understand what they are investing in and to find those high-quality businesses with strong fundamentals.
Do you have a question or a company you'd like me to take a look at? Email me at Chase@WilseyAssetManagement.com!
Chase is a financial analyst for Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760 as the co-host for the Smart Investing show with his father Brent Wilsey. Information is provided by Reuters.
Sign up for our free weekly e-newsletter for economic updates, investment advice, and various company analyses. Articles are written by well renowned investment expert Brent Wilsey. Please visit our Archived Newsletters tab to view past articles.
Would you like the Smart Investing E-Newsletter sent to your inbox every Tuesday?