Goldman Sachs.

In one of my previous articles (“Predicting rain doesn’t count, building arks does”) I stated:

“Other than that I was sitting on the sidelines and waiting for a bargain to pop up, and while I’m doing that I started piling up cash. Although in 2018, I invested in one stock and I’ll tell you all about it in my future posts.

I’m going to go out on a limb and give you a sneak peek of my portfolio; we’re going to talk about Goldman Sachs.

According to Howard Marks’ book “The Most Important Thing Illuminated”, there are two types of buyers of stocks on Wall Street. The first type is the “First Level Thinkers” and the other type is the “Second Level Thinkers”. In general the first level thinkers do not conduct any research about the companies and the businesses that they are about to buy. They only check the symptoms on the Main Street or Wall Street and according to that they decide whether to buy or sell the stock. Put it in Howard’s own words:

“First-level thinking says, “It’s a good company; let’s buy the stock.” Second-level thinking says, “It’s a good company, but everyone thinks it’s a great company, and it’s not. So the stock’s overrated and overpriced; let’s sell”

In order to achieve higher returns you must be a second level thinker. Reading the company’s quarter and annual reports, background check the management, calculating the company’s intrinsic value, figuring out its future potential, and taking all other aspects that can influence the share price into consideration. These are by far the most key actions for one to determine if the company is worth the investment.

Let’s talk Goldman

Goldman Sachs is an investment bank; it provides financial services to corporations, financial institutions, governments and individuals. The operations of the bank can be divided into four segments; Investment banking, Institutional Client services, Investing & Lending and investment management.

Business Segment chart:

GS table of segments

Table of Pre-tax earnings for Goldman Sachs over the period of three years:

gs revenues

Institutional Client services:

In 2017, most of the bank’s revenue came in from the Institutional Client services. Which as you can see in the first table above is divided into other segments, the Fixed Income, Currency and Commodities Client Execution (FICC) and the Equities. Last year, it accounted for 37% of all of the bank’s revenue. The year 2017 was an exceptional year for the market as a whole (not for Goldman Sachs though), the steady increase in the prices of stocks in general helped the Investing & Lending segment but hurt the institutional Client Services Segment, the volatility was very low, less volatility in the markets means less active clients for Goldman Sachs, and less hedging, the combination of those factors will negatively impact the revenue in this segment.  By the way, it’s not just Goldman; Since 2009 all of the big banks suffered a decline in their fixed income trading revenue; according to the Wall Street Journal the fixed income trading revenue at the 12 top banks stood at $145.5 billion in 2009, and was cut down to $68 billion in 2017. For Goldman Sachs the net revenue in Institutional Client Services was $11.90 billion for 2017, 18% lower than 2016. The net revenues in FICC Client Execution were $5.3 billion for 2017, 30% lower than 2016; the FICC is a very important factor for Goldman Sachs because it once was the main profit generator for the bank.

Investing & Lending:

This operating segment includes the bank’s investing activities and the origination of loans and providing financing to their clients. At the end of 2017, the Investing and Lending operations generated net revenues of $6.58 billion which was 61% higher than 2016. The uptick in the revenue is a result of the higher global equity prices in 2017. A global equity selloff or macroeconomic concerns will hurt the revenues in the Investing & Lending segment.

The other two segments are Investment Banking and Investment Management which you can check those segments in the Annual report.

Goldman’s New blood & Marcus

After it was known for Wall Street that Lloyd Blankfien the current CEO is about to retire; it paved the road for David Solomon and Harvey Schwartz to take over the helm. Harvey later announced his retirement too, which made David Solomon the sole competitor for the job. As he ran the Investment Banking segment both the profit margins and the revenues went up significantly.

Marcus is a new platform that Goldman Sachs had developed which was named over the founder of its founder; it offers loans and accepts deposits from retail clients which give Goldman access to the less wealthy clients.

Goldman-backed Circle buys Cryptocurrencies exchange Poloniex

Other voices on Wall Street are calling for upside in Goldman Sachs:

JP Morgan analysis pointing out an upside for GS saying it’s their favorite bank stock to hold now on Wall Street:

Jim Cramer said on Feb. 27 2018, that he started buying the stock because it’s a “value play”: