Contributed by: Nicholas Boguth
A quick Google search tells us that the odds of winning the Powerball Jackpot is roughly .000000003%. The odds of getting struck by lightning is roughly .0002%. What are the odds of getting rich by investing in a stock that grows by 100x in a year like Gamestop? Also slim.
It is hard not to envy those individuals posting screenshots of their LIFE-CHANGING gains like we saw last month with some of the lucky winners of the GME hysteria. The only problem is that it is far more likely that style of investing ends with life-changing LOSSES.
How often does a stock return 100x?
Christopher Mayer explored that question in his book, “100 Baggers”. His research found that 110 stocks returned 100x between 1976-2014.
Pair that with research from Credit Suisse and you soon realize that if your goal is to get rich quick, the odds are stacked against you. The number of listed securities has fluctuated from 3,000+ to 7,000+ over the past 50 years, and there have been OVER 15,000 new stocks listed in that time frame alone.
Some “back of the napkin” calculations would suggest that there is a ~0.5% chance you pick the stock that returns 100x, and that is assuming you hold through all the turbulence and sell at the correct time as well.
Back to the major problem – while 110 stocks returned 100x, there were THOUSANDS of stocks that failed. Some go bankrupt or get delisted because they never trade above $1/share, or lose 90% of their value and plateau. There’s a good chance a lot of those companies shared the financial position of Gamestop as well (Gamestop lost almost $500M in 2020).
So when we see a Reddit user celebrating their life-changing journey from $50k to $5M, know that there are DOZENS of individuals who tried the same thing – but are sulking in a less fortunate journey from $50k to $0.
At The Center, we believe in a more sustainable, long-term approach to gaining (and preserving) wealth. If you have questions about how that applies to you and your financial plan, please don’t hesitate to call or email anyone on our team.
Nicholas Boguth is a Portfolio Administrator at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.
Any opinions are those of Nick Boguth and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.