This week, I wanted to try something different for Options Arena.
Until now, we’ve focused this feature on specific asset classes and stocks. But there’s a major movement happening right now in investing. And whether we like it or not, we’re all a part of it.
I’m talking about the push to “democratize” investing. The things that megacorporations and startups alike are doing to make investing more approachable and accessible than ever before.
It’s easy to look at this as an altruistic thing. That the more people investing, the better. And in many ways, this is true.
Yet, beneath the surface occasionally lurks some questionable tactics. It’s not always clear who this push benefits more — the haves, or the have-nots.
Before we get to our experts’ takes, I have to give a hand to our very own Amber Hestla, yet again, who has captured your hearts and minds in every Options Arena so far…
Will she keep her streak alive? It’s up to you to decide…
Now, on to our experts.
Chad: It’s Been Fun, but I Think This Mania Is on Its Way Out
I think the competition in the investing community is great. Even the new investments — NFTs, cryptos, and in many ways options — are all generating more ways to make money. At the end of the day, that’s exactly what we want.
It reminds me a little bit of the dot-com bubble, when everything was running higher and jumping just on news of adding “.com” to their name.
That’s the phase we have been in lately, where someone in their living room made a killing trading on their phone and quit their job. The day-trading glory days have come roaring back.
But I think that latest correction we have seen in the market took some of the froth out of it. Some of those traders who were thinking, “hey, maybe I can quit my job and trade from home because everything goes up” got a reality check.
There’s nothing wrong with it. It actually means we are likely on the backend of this phase and I expect things to settle out.
That may not be exciting news, but it tells me to be bullish on some of these beaten-down names (not Facebook) and stick to our strategies.
It’s no doubt been a rough period for strategies that have dominated the last decade or so. Things have changed. Now I think it’s likely we get back to what was working before.
Mike: Democratized Investing Is Great, and We Don’t Do Enough
Did you know that emails “hurt IQ more than pot”?
That was a CNN headline in 2005 as email was becoming mainstream.
Widespread access to new things always raises alarms. There were concerns about the harm of the printing press in 1565, the dangers of newspapers in the 1700s, and the perils of children attending school in 1883. The list of things that will hurt society as they spread is long.
It’s only natural that we would see concerns about the democratization of finance. But the biggest concern I have is that this trend hasn’t gone far enough.
Gallup noted in 2021 that a little more than half of all Americans own stocks.
(Click here to view larger image.)
Stock market exposure should be universal, so that future generations can profit from the growth of America. Imagine your grandfather had gifted you an index fund when you were born. You’d have shared in the growth of the country and the stock market since then. If you were born before 1975, that wasn’t possible since index funds didn’t exist.
That first index fund, with the promise to democratize investing, was met with skepticism.
But index funds are widely recognized as useful now and that’s how most Americans gain access to the stock market. But we need more Americans involved in the stock market.
This a long-term trading idea since it will unfold over decades. The best trades are the index fund providers. BlackRock, Inc. (BLK) is the sponsor of iShares ETFs. State Street Corporation (STT) sponsors SPDR funds and is the best way to benefit from the expansion of stock ownership.
Amber: Forget Wall Street… This Is Where Small-Timers Will Flock to Next
Mike included a catchy little cartoon in his article on Tuesday. Well, I know how to search the Library of Congress as well, and think I found a cartoon that explains quite a bit about today’s markets.
As this 1882 cartoon shows, democratization of Wall Street has been an issue for over a hundred years. Everyday Americans were like moths drawn to the candle that was represented by Wall Street pros. In those days, the pros laid in wait to destroy the moths.
The worriers believe regulations are needed to save investors from themselves. Regulations to protect investors date back to at least 1720, when Parliament passed the Bubble Act after the South Sea bubble collapsed. But markets keep finding new ways to attract individual investors and those investors keep finding ways to take speculation to extremes.
Markets have a way of correcting excesses. Remember, a two-year bear market followed the internet bubble and major indexes needed more than a decade to reach new highs. As individual investors face losses, they will turn away from stocks.
That’s why I believe DraftKings Inc. (DKNG) is an excellent long-term trade.
Even when individuals lose in the stock market, they retain a desire to get rich quick. Now that sports betting is legal, DKNG will be the next big thing. The stock is risky and could drop more than 50%. So, I recommend a January 2024 $10 call that’s trading at about $14. Shareholders could lose more than $14 but the long-term call caps your risk and retains some value as long as DKNG remains above $10.
I think gambling is the natural next step for traders facing losses in tech stocks, and I want to stay one step ahead of them.
Chris: This Trend Isn’t Slowing Down, and This Stock Is the Top Play
I was actually talking about this topic with a former floor trader this past week. He says everything that has happened in the financial markets over the past 10 years has been moving in the direction of democratization.
We tend to think of it being a more recent event, with the rise of Robinhood and the explosion of retail investing. But this started when this floor trader was out of a job 10 years ago.
It used to be guys in a pit who had all the access. It was a secret club for the ultrarich and you weren’t invited.
But as exchanges went digital, you didn’t need to be in the pit to get a bid or execute an order. Now anyone can open a brokerage account online. Robinhood took this mainstream with the introduction of commission-free trading. Fractional shares have democratized investing even further — you don’t need to pay a thousand bucks to own Tesla and Chipotle anymore. You can buy in for five bucks, if you want.
Like any trend, it won’t move in a straight line. Some of the new traders who have cropped up in the last two years will get out of the game. They traded small caps and cryptocurrencies and have lost their shirts in recent months. So right now, we’re in a medium-term downtrend in a much larger uptrend.
Play the rebound. Robinhood is down over 70% from its high. It’s worth just over $10 billion.
This will be a $500 billion stock someday. I just bought 60 more shares as I typed this up.
But we’re True Options Masters. Bet on Robinhood returning to its high of $55 within the next two years with the 19 Jan 2024 $55 call option. At last glance it’s trading for $1.70. If this happens by December, you will make a 1,000% gain.
And if you’re wondering whatever happened to that former floor trader, you’ll find out very soon…
You’ve heard our experts’ takes on democratized investing — the good, the bad, and the profit opportunities…
Now it’s your turn to chime in. Vote for this week’s winner by clicking here or the image below!
Mike Merson Managing Editor, True Options Masters