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Podcast: Quarterly Market Insights – Fall 2019

Amid a particularly complex global economic and political backdrop, Jeffrey Mills, Chief Investment Officer at BMT Wealth Management, tackles a number of the most pressing topics for investors. There is something for everyone in this podcast, as the discussion ranges from the practical considerations of how to invest new cash, to more complex topics like forecasting the next recession and the U.S. national debt.

Click here to view the full Fall 2019 Market Insights publication.


Introduction:                     Welcome to the Bryn Mawr Trust wealth management podcast, providing commentary on what’s moving the financial markets, financial planning, and other timely business and monetary topics. Please welcome your host, Jeffrey Mills, chief investment officer at BMT wealth management.

Jeff Mills:                             Yeah, so here we are. I’m doing my first podcast here at Bryn Mawr Trust. I’m very excited to be doing so. I had the pleasure of working on my first quarterly publication, which I’m very excited about and the team here has done, done a wonderful job. We’ve taken a little bit of a different tact in this particular publication. It’s a little bit less of a market summary and we decided to touch on a lot of different topics that in our travels clients seem to be most focused on. So that’s what I’m going to try to walk you all through here today and just give you a high level view as it relates to some of those areas of the market. I’m not going to be able to touch on every single topic and the publication, we’re calling it a top 10 list. And so that’s how it’ll be structured in the paper.

Jeff Mills:                             I obviously encourage everyone to take a look at that, but I’ll walk you through some of the areas where I feel like maybe the most interest will lie. But before I dive into the specific topics, I figured I would just give a very quick 30,000 foot view as it relates to our, our market outlook. And I think we really do believe that the odds favor a continuation of this economic and market cycle. But I think obviously just given the political backdrop and everything that the market is contending with, we have to acknowledge that there is this chance for heightened market volatility. And I think when you have that backdrop, it can often be really difficult for investors. So really what we’re telling folks is it doesn’t make a whole lot of sense to lean too far in either direction. And what I mean by that is, you know, getting too defensive right now in a portfolio.

Jeff Mills:                             I really think risks being left behind if some of these things end up turning out a little bit better than the market fears. And I think for us that’s generally our base case scenario. But at the same time, I also really don’t think it makes a lot of sense to get too aggressive either. I think clearly with the backdrop right now in some of these things that are so uncertain like trade and they can be so impactful on the forward outlook, I think we have to be at least a bit cautious there. So really what does that mean? I feel like that leaves us in the middle. I think what it means is you have to take stock of your exposures, understand what’s there, understand really what your portfolio is composed of. Make sure that you pair back areas of risks that have gone beyond the scope of their intended allocation.

Jeff Mills:                             So if your stock allocation has gone beyond sort of what your strategic allocation should be, take a look at that. And we’re definitely stressing trying to ignore the day to day headlines because they will whip, saw you back and forth and that’s not going to be helpful as it relates to sticking with your plan. So again, just to reiterate, I think an imminent recession is not our base case scenario. All, even if the market sort of acts that way in the interim. And we have seen data that supports the economy. So housing data has gotten better as interest rates have come down, consumer confidence has come down a bit but still remains at really solid levels. So not so concerned there. And the credit markets are still functioning very very in a really healthy way, I would say. So no signs in those areas that are typical before an economic recession.

Jeff Mills:                             So that’s just a quick outlook. Hopefully that gives you an idea of where our heads are in terms of the broad market and really how we’re describing to our investors how they should be positioning their portfolios. So let me dive in now to some of the topics that, that we touch on in the quarterly and they’re really, they’re really wide ranging. So we’ll jump around a little bit. But I think it dovetails nicely into our outlook and it’s a question we get all the time from clients. It’s, if we have new cash, what should we be doing when the markets are this close to all time highs? I think it’s a very natural question. Nobody wants to invest a large sum of money in the stock market just as it peaks. And I think that that fear is always amplified when markets are near all time highs as they are today.

Jeff Mills:                             So really what should investors be doing with cash? How should they be thinking about investing? And the conventional wisdom is dollar cost averaging. That’s the best approach. So you slowly buy into the market over time and you mitigate sort of buying at exactly the wrong time. The problem is is that the math tells us that dollar cost averaging actually doesn’t really work. It might be a good behavioral tool to get you to incrementally put cash into the market. But when you look at the numbers, it actually does not produce the best results when thinking about investment return. So I feel like that’s something important to highlight when people are a little bit cautious about putting money to work, when the market is where it is. The, the simple reason for this sort of counter intuitive conclusion is that the market goes up over time.

Jeff Mills:                             So more likely than not the market is rising. So you are averaging in to a rising market. So the costs that you end up with after all your money is invested is higher than what it would’ve been if you would’ve just invested it all at once. Seems really simple, but it’s not something that people really pay much attention to and dollar cost averaging still is you know, extremely pervasive as it relates to an investment strategy. But I did want to point out that, you know, if you look at the numbers, it doesn’t necessarily make sense. And just to give you some perspective we went back and looked at data from 1960 through March of this year and lump sum investing outperformed dollar cost averaging over 70% of the time. So that’s looking at a scenario where you dollar cost average in equal increments every quarter over a year versus just investing it all at once.

Jeff Mills:                             Right up front. That equated to an annual price difference of about 2.2% that that spread would be even higher if we included dividends. So that adds up over time. When you constantly have to put new cash to work, if you’re constantly dollar cost averaging, likely what you’re doing is increasing your average price. So if you’re playing the odds and if you don’t have a really strong point of view that the market’s going to go down over the next, say, 12 months, in this case the math would tell you to just invest. Now, even when the market is this close to all time highs, even when valuations are above normal the conclusion is always the same. The percentage is still favor investing all at once. So that was the first topic we touch on. There’s a little bit more detail on the quarterly, but hopefully that gives you an idea of that particular area, which I do think is extremely important.

Jeff Mills:                             The next question, so shifting gears a little bit, but going back to some of the comments I made earlier. This is a question we get all the time. You probably read it in the news all the time, watch it on TV all the time. Are we going into a recession? Our particular point of view is that recession fears at this point are probably too high. Even if you look at sort of the, the words us recession in news articles, it has spike to levels similar to what we saw in 2011 2012 back during the European debt crisis. And some of these points in history where I would say the risks were actually more elevated than they are today. So the fear is pervasive. But I don’t know that reality necessarily reflects those risks. So one of the thing that’s been pointed to kind of time and time again this year is what we’ve seen in the manufacturing sector.

Jeff Mills:                             So, whether globally or here in the United States what we’ve seen is manufacturing readings, rollover, and in many cases and recently here in the United States actually fall below levels which will be associated with economic growth. So signaling and actual contraction in the manufacturing sector. So I would point out a couple of things as it relates to that. Number one, the manufacturing readings that are most looked at by investors are the ism manufacturing, PMI. So what you see over time is that actually falling into contraction territory a lot. And those contraction readings and manufacturing aren’t always associated with a recession. So it’s really not a reliable gauge. We actually saw it happen in 2015 and 2016 when we had problems in the energy patch. We’re seeing a soft patch in the economy again today we have dipped below 50, but again, lots of false starts as it relates to that particular reading.

Jeff Mills:                             What tends to be less volatile and more representative of an economy here that’s likely going, going into a recession is the ism PMI reading that’s focused on services. Over the last, you know, 20, 30 years, you’ve only had one false start where you’ve had, you know, six, seven, eight false starts on the manufacturing side. So that services reading is still above 50. It’s not indicating a recession yet. It’s still indicating expansion in the services sector. And for us it should be somewhat intuitive in that our economy here in the U S is, you know, 15, 20% manufacturing a with the balance being services. So that is more important for our GDP growth here. You know, also just globally, I will say as it relates to manufacturing, you had this big slowdown. I think part of it has to do with trade. I think probably an underappreciated part of it has to do with the fact that we saw global interest rates rise really dramatically in 2018 and typically it takes about 12 to 18 months for a rise in interest rates to filter its way through the economy.

Jeff Mills:                             So I think we’re actually still contending with that rise in interest rates. But what we have seen is that the percentage of countries with rising PMI [inaudible] so that would be a positive scenario, has gone from 17% in the second quarter to 35% in the third quarter. So it does appear like we’re in the early stages of what would be a bottoming out in some of those manufacturing readings, which have really stirred up a lot of these Russia recession fears this year. So our guests would be that in the first quarter of 2020, you start to see some of those readings look a lot better and you probably start to see the recession fears that have been priced into interest rates and to some degree into stock prices go away. I think interestingly and, and perhaps positively for the stock market, I think what these fears, that again may not be representative of reality, what they’ve done is they’ve, they’ve kept sentiment regarding the stock market actually very low.

Jeff Mills:                             So people just simply are not optimistic about the prospects for the stock market. And usually when you make major tops in the stock market, people are very optimistic. It’s usually a good Contra indicator. I often referenced something called the AAI bull bear spread. So they just ask people, are you bullish about the stock market or are you bearish about the stock market? And they take the difference. So the most recent reading was negative 18%, so 18% more bears than bowls. That reading looks very similar to the reading that we actually saw in the fourth quarter of 2018 when the market was basically completely falling apart. So you’re in an environment where the market’s a few percent from all time highs, but the sentiment is reflective of a market that was down 15 and 20% a year ago. So people are not feeling good about this market even though it’s held its head pretty well.

Jeff Mills:                             And we would say that’s generally a good setup. It’s not the only thing that’s important. People can get more bearish in the market could go down, but that type of negativity is typically not associated with a major top in the marketplace. So a decent setup, I would say overall. Let me switch a little bit now to another topic. It’s, it’s still macro in nature, but a little bit more specific as it relates to exposure in the equity market. And it’s trying to unpack a little bit the divergence that we’ve seen within domestic and international equities as, as well as growth and value equities. You know, co conversations with clients over the past number of years when looking at a fully diversified portfolio have gone something like, Hey, why do I have international stocks? They’ve performed terribly. Why aren’t I just in the S and P 500, basically anything you’ve owned outside of large cap us stocks over the past 10 years, you have pretty significant buyers remorse.

Jeff Mills:                             So clients are saying, why am I still in international stocks? And in the same breath, why am I still in value? Stocks, growth, stocks, technology, et cetera, have far outpaced the traditional value stocks. So I, I think talking a little bit about why we still believe exposures in those areas make sense is really important. And it is a topic that comes up all the time. But just to give you some perspective. So over the last five years, the S and P 500, so a us large cap stocks have had an average annual return of just about 11% where you’re comparing that to about 3% for developed international equities. So that’s a huge gap. And if you go back 10 years, the story actually gets worse. The S and P at 13% and developed international stocks of 5%. So that’s where all these questions are coming from because international stocks have just not kept pace at all.

Jeff Mills:                             So what we did was we went back and we looked out through history and we said, okay, well is the conventional wisdom that you should have international stocks in your portfolio? Does that bear out over time if you look at the data? And the long and the short of it is, is that back to, I think we went to 1969 whether us or international stocks perform in any given year as basically a coin toss. And if you look from 1969 through, you know, say the mid nineties the cumulative return of international and us stocks was basically the same, so they would perform well and poorly at different times. But overall it made sense to have exposure to both since the mid nineties. The performance has not been as consistent in international stocks. And what we found is the reason for that is, is that international stocks tend to be tilted toward value.

Jeff Mills:                             It’s the growth companies, the technology companies, they’re the ones here in the U S so what happened in the mid nineties, the tech bubble started to inflate. So you started to have international stocks underperforming at that point in time. Again, you’ve had that same scenario play out over the past 10 years. So when that growth style does well, us stocks tend to do well along with it. So it’s really been this style differential between the two regions that has driven the outperformance in us. Now, we do not believe that value stocks are doomed to underperform forever. In fact, when you look at the valuations, if you look at the price to earnings ratio, for example, between value and growth, stocks, growth stocks are very expensive when compared to value at this point in time. There just about two standard deviations away from the average expensive. And that’s a lot.

Jeff Mills:                             It’s meaningful. Valuation is not going to help us time the shift in performance, but what we do know is that the price you pay is basically the only thing that matters when you’re thinking about your returns over the next, say, 10 years. So for us, we feel like we could be getting close to a tipping point where you will see that shift. And I think if I’m sitting here talking into this microphone 10 years from now, we’re going to be having the exact opposite discussion and you’re probably going to have seen value do better and you’re probably going to have seen international do better. And that’s simply a valuation argument. So again, we’re not going to try to time the shift in performance, but what it does mean is we want to maintain exposure in both of those asset classes. So now I’m going to switch switch gears again because all of these topics are very different from one another, but the next two will be somewhat similar because it focuses on on debt.

Jeff Mills:                             I want to talk about corporate debt and I want to talk about the U S debt and deficit. These are also things that come up very often in client conversations, particularly as the election heats up. I would imagine you’ll be hearing more about the U S debt and deficit. So how are these things factoring into our investment strategy and the way we’re positioning portfolios? So number one corporate debt has increased quite a bit over the past 10 years. Companies have taken advantage of low interest rates and they have issued more debt. So the question is, you know, is this, is this a ticking time bomb? Is this cause for concern? And if it is, how should investors be preparing? So the first point is there’s no argument. The actual dollar amount, the level of corporate debt is certainly larger today than it has been in the past.

Jeff Mills:                             So on the surface this looks bad. But really when you get down to it, what you should be concerned with is does that level of debt pose an issue for companies as it relates to their ability to pay it back? That can be large, but the economy has grown over that time. Companies have increased earnings over that time, so it is all relative. So as it relates to some sort of imminent crisis, we tried to figure out, okay Ken companies pay back debt. What are some of those ratios look like? And if you look at the corporate debt outstanding relative to from profits for example, so we would call those leverage ratio ratios. They’re actually at pretty reasonable levels and you also have companies generating enough free cash flow to comfortably service their debt obligation. So debt coverage ratios actually still look pretty good.

Jeff Mills:                             And interestingly, we just looked at interest coverage. So sort of that short term liability that companies have to pay year in and year out. Companies in the S and P 500, for example, can cover interest costs seven times with their earnings. So that’s actually a more comfortable margin than companies enjoyed throughout the 90s, throughout the 2000. So again, from that perspective sure we prefer less debt than more, but in trying to sniff out whether this is going to be an imminent problem for companies, I think the liquidity and the earnings that they’re able to produce are actually reasonable enough to assume that debt levels aren’t going to be a, an imminent problem. I think we are sensitive to the idea that when the economy finally does shift, companies obviously make less money, earnings go down. And that could stress debt markets.

Jeff Mills:                             But I would say what I would say is number one, our, our view in the economy is still clearly reasonably positive. So again, we don’t think that, that that’s an imminent issue. But there are also, there are always credit stretches when the economy goes into a recession. That’s always the case and we’re not quite sure that this time around is going to be any different than sort of what would be typical in that sort of environment. But that doesn’t mean we aren’t doing anything in, in portfolios and we are reacting in our fixed income portfolios. So number one, we all, we are altering the duration of our credit exposure. So we still favor corporate bonds. We think, again, are the, the prospects for the economy in the near term, we’re still pretty positive, so we’re okay taking on corporate credit risk, but we are shortening the maturity there.

Jeff Mills:                             So longer maturities are more exposed to price depreciation when you do have credit spreads widen when investors become concerned about the credit market. So that does help minimize some of the credit risks there. And we’re also just generally moving up in credit quality. So within investment grade, you know, you go every, eh, you go all the way from triple B to AAA. So we feel like at this point in time given the fact that we probably are later in the business cycle, that debt levels are, although comfortable from a coverage perspective are high. So we would prefer to have our corporate credit exposure be sort of in that a category versus looking at something that would be a triple B or closer to high yield. And then transitioning Justin to the U S debt. A little bit of a different discussion, but similar in the sense that since the financial crisis, the national debt as a percentage of our GDP in the United States has continued to climb higher.

Jeff Mills:                             So we raised the same question, should we be worried? And I think the natural tendency, like I said, is for people to prefer less debt than more. There’s actually a time magazine cover in 1972 and it says, is the U S going broke? But that was from the early seventies. So this is not a new concern. People are always concerned about debt levels that companies have and that in this case that the U S has. And like I said, we would agree lower debt levels are preferable, but it’s hard to make an argument that current levels of net, a national debt pose, what would I call an imminent risk to the market or the economy? I think people always ask, well then, okay, fine. What’s the breaking point? And I think unfortunately the breaking point is unknown. We don’t know what the dollar amount is. That’s all of a sudden going to become a problem.

Jeff Mills:                             Think what we do know is that the real problem comes into play when the U S is actually in in real risk of defaulting on that debt. And if you look at analysis from Moody’s and other rating agencies, the U S is nowhere near a real default risk. So we don’t believe we’re near that breaking point in which the U S debt could actually break the market or the economy in a real meaningful way. If, and if you’re worried about current levels of debt, it’s like you sort of have two choices here. And this isn’t fun, but because this is a big existential risk, we’re timing the potential breaking point is almost impossible. You can either take all of your money and basically bury it in the backyard and you could end up waiting decades for this debt to become an issue. And then you may have issues retiring or meeting whatever your financial goals are or you can sort of know that this is a risk and keep it in the back of your mind and try to pay attention to it.

Jeff Mills:                             But I think you continue to invest basically business as usual. And those are really your two choices and there really isn’t a whole lot in between depending on what your risk tolerance is. So let me just make a few quick points on this before we move on. Number one is, is there a relationship at all in the near term between the levels of debt that the U S has and market volatility or market performance? And the interesting answer is, is no. I mean the U S national debt has increased by 8% every single year since 1966 and over that time, the S and P has gone up about 10% per year. So clearly rising debt levels in and of themselves aren’t an impediment to equity returns. Say, okay, maybe it’s not, maybe it’s not just the size of the debt, maybe it’s debt relative to the economy, so debt to GDP.

Jeff Mills:                             But again, there’s no discernible pattern in the market. I went and looked at some periods where you had a really rapid advance in debt relative to the size of the economy. So as an example, from 1982 to 2016 that debt to GDP ratio moved from 32% to 105% I mean, that’s a big ramp up in the debt burden of, of our country. But over this period of time, the S and P 500 gain 12% a year. So again, it doesn’t mean that that is good or debt ultimately doesn’t matter. It just means that it’s very hard for us to identify a discernible pattern between where debt levels are going in the near term and how the market’s likely to behave. So that’s one. One final point I’ll make is cause I get this question a lot. People look at where we are from a debt to GDP ratio.

Jeff Mills:                             I just mentioned we crossed that hundred percent threshold. So people say, well, Oh my goodness, like we’re going to become Japan. Japan’s debt to GDP ratio past 100% in the mid nineties. And since that point, their GDP growth has been extremely slow. I think from the mid nineties. Once they crossed that 100% threshold over the next 10 years, Japan’s real GDP grew a cumulative 11%, not 11% per year, but a cumulative 11%. So it’s a little bit better than 1% a year. By our standards in most other countries standards, not great. I mean that’s, that’s very slow growth. So people automatically look at their debt levels and their growth and equate the two to one another and say, okay, we’re in that exact same spot. So now we’re going to be destined for this sort of very slow muddle through economic growth because our debt levels are so high.

Jeff Mills:                             Interestingly, if you adjust Japan’s GDP for the size of their working age population, it’s basically exactly the same as ours. So Japan doesn’t necessarily have a debt problem. Japan has a demographic problem and we have one too, but it’s nowhere near the issue that Japan is dealing with. And we also have the benefit of obviously this can be political, but we’re able to have immigration things of that nature. So even though we have an aging population and a three string shrinking labor force from within, we do have immigration to help bolster the size of our labor force. So I don’t know that we’re necessarily doomed to slow growth just because of our level of debt. And I like that Japan analogy because people use it a lot, but I think they’re missing that demographic element, which has been really important to why their economy has grown so slowly.

Jeff Mills:                             So I’ve been talking for a long time. I only have two more topics left, but hopefully they they’re interesting. So we’ll keep, we’ll keep trudging ahead. And this is, it’s a reasonably nice segue because you can’t have a market outlook or a discussion about the markets, unfortunately without talking about politics. It’s just so pervasive whether you’re thinking about trade or whether now we’re talking about potential impeachment or very soon the election is really going to be ramping up. So this is something that it’s in the minds of investors and it’s something that I feel like we, we at least need to comment on. The one very broad comment I’ll make is that I think what we want to focus on are things that are likely to directly impact fundamentals in the economy. I’ll use impeachment as an example. So if you go back to Nixon, if you go back to Clinton, the market basically continued on the path that was already on before those impeachment inquiries became so prevalent.

Jeff Mills:                             So I think it’s really going to be things like trade and, and the outcome of those negotiations that are more impactful to the ultimate direction of the market. So we’ll focus a little bit on how we look at the, the outcome for trade. And I’ll just start by saying that we can’t predict it and neither can anybody else. You can speculate and you can try to figure out what’s going to happen. But it’s something that we just don’t know the answer to. And I think for now, at least where I’m sitting today the, the Chinese in the U S are currently in, in talks right now down in D C so we’ll see what the outcome is over the next couple of, by the time you’re listening to this, it’s probably already been determined. So the market will react to that. But this week certainly, and if we don’t get a resolution over the next couple of days, the market is held hostage by these trade talks.

Jeff Mills:                             I just don’t think we can advance dramatically higher without companies having a little bit more clarity as to what the rules of the game are. If they don’t know where their supply chains are going to be or what tariffs are going to be, it’s very difficult for them to invest confidently in their businesses if they’re not investing in their businesses. The overall productivity of the economy stagnates and that’s a huge impact on economic growth. So what we’re dealing with now is, is these negotiations and I do believe that you know, number one, like I said, I don’t know that it’s the size of the tariffs that matter. I think it is, it’s an issue with investor confidence and it’s an issue of, of companies not investing in their businesses. It’s a two sided negotiation. But what from the U S perspective, what I, what I do think we know is that the president’s approval rating, if you look at the ups and downs in the approval rating, it’s been really highly correlated with a deescalation in trade talks.

Jeff Mills:                             I think folks generally support the idea that something needs to be done with China. I think there are differing opinions as it relates to how the administration is going about it. But it’s interesting that really Trump’s approval ratings have been associated with a deescalation of trade tensions. And also if you look at a president’s approval rating, it just about equates to the percentage of votes that they’re likely to get in a reelection bid. So I’m hard pressed to believe that the president doesn’t know that. So I do think that he’s probably more app now to make some sort of a compromise. I highly doubt that we’re going to get some sort of grand bargain that includes intellectual property transfer and forced joint ventures and all of these things. I just don’t think that that’s realistic, but I also don’t know that that’s what the market needs right now.

Jeff Mills:                             I think what the market needs is some sort of credible ceasefire where companies believe that tariffs are not going to escalate from where they are now. And I think if that’s the case, the market will end up pivoting its its attention to things like earnings and economic growth. And that that’s probably generally more healthy because those things are certainly more predictable than, you know, any given tweet or headline that can come out and, and move the markets during any single day. So this is sort of a, we’ll be determined. We’ll see what happens. But I do believe that the president is likely to try to make some sort of compromise and I think that will help the markets incrementally. And from, from the side of the Chinese, you know, there’s been a lot of speculation or at least one of the more popular narratives is that, well, they’re just going to wait Trump out.

Jeff Mills:                             Now, you know, the impeachment inquiries, they’re just going to wait. They’re not going to do any kind of a deal and they’re gonna wait for him to be removed from office or not be reelected. But think about somebody like Elizabeth Warren, you know, she’s not going to be any picnic for the Chinese either. In many ways she’s even more hard line. So the Chinese might be waiting out, president Trump to end up with somebody like president Warren and they’re going to be in a worse spot. So I think that them doing that and that being the major card they are playing is taking a risk on their side and they’re having their own issues. There’s issues with Hong Kong. Their economic growth has been slowing as well. So again, there might not be enough to get these two countries to compromise enough to have a big all encompassing deal, but it might be enough to have them compromise in a small way that’s enough for the market to at least pivot away from trade a bit.

Jeff Mills:                             At least that’s what we’re hoping. The very last topic I will cover is the IPO market. You know, it’s been in the headlines a ton because we’ve had a lot of really high profile companies list their shares on public exchanges. And it’s interesting the, the behavior of those IPOs or the performance of the stocks after they’ve gone public has really prompted a lot of questions from the investor community. So when you look at companies like Uber or Lyft, Slack, I mean these are generally names that we know pretty well and those stocks have not done well at all after their IPO. So it’s making some investors worry that there’s this lack of demand for IPOs and this is some sort of warning sign as it relates to the broad market. And maybe these are kind of the first cracks that investors are going to be pulling back on risk and it could be a problem for the overall market.

Jeff Mills:                             We work is another example. That IPO was actually pulled. So again, that only kind of inflamed the concerns that okay, the IPO market is starting to crack. Investors are pulling back and maybe this is a harbinger of, of things to come in the broad market. We don’t believe that the struggles in some of these high profile IPOs are actually indicative of some sort of issue in the broad market. I think if I were to summarize our view, I would say there are certainly pockets of excess that have arisen in the private markets. But the performance of IPOs overall in 2019 is actually been okay. And I think that the failure of some of these larger IPOs often is associated with the fact that they’re not profitable. So overall companies actually have been able to raise capital in the public markets this year.

Jeff Mills:                             But investors not just willy-nilly sort of throwing capital at any company coming to market, especially companies that have brand names I actually think is a good thing. And I think it underscores the point I made earlier that there isn’t a huge amount of euphoria in the market. So overall I think this behavior is actually fairly healthy. So the two points I have here are I just, I just stated the first that there’s really no example of euphoria and I have some stats here. The average first day IP overturn in 1999. So the tech bubble kind of the best example of euphoria. So the average first day return of an IPO was 57%. That’s euphoria.

Jeff Mills:                             That’s an IPO market that is doing so well. It’s unhealthy today. The average first day return is 19%, a little bit higher than the average. Put nowhere near the 57% that we saw in 1999. I think just the main takeaway for investors is when you’re thinking about investing in an IPO, you have to do your own due diligence. You have to look at the companies and understand the business model, understand the fundamentals. I think simply participating in some sort of big name IPO does not guarantee a large return. You know, over the past 20 years, you have 30% of IPOs with sort of a five year buy and hold strategy. If that’s what you were to employ, you buy the IPO, you hold it for the next five years, 30% of of those investments would be down 50% or worse. I’m not a good thing.

Jeff Mills:                             If you were to not do your homework and be involved in one of those IPOs but then on the other hand you have another 25% that were produced returns over that period of more than a hundred percent so again, you can make money in the IPO market, but the returns are so varied that you really need to make sure that you’re doing your work. And Oh by the way, the average age of a company going public today is about 12 years and this is just for technology IPOs as an example where in 1999 it was three or four years. So you’re getting companies that are probably a bit more healthy, which also is a good thing. But I think public market investors have to realize that a lot of those really outsize returns have probably already accrued to the private investors because they’re the ones who have held shares in those companies, in the private markets from sort of age four to age 12 where you know, many years ago you used to be able to get into those companies in the public markets.

Jeff Mills:                             And that’s just not the case today, so something to think about there. Overall, I think the IPO market is still generally healthy. Again, the lack of euphoria I think is a good thing and if you’re an individual investor thinking about participating in an IPO, just make sure you do your work. So that was a whirlwind tour of lots of different topics. We actually cover a few more. I don’t think that was 10 we cover a few more in the actual publication so I hope everyone takes the time to read that and we are always here to answer any of your questions you may have after listening to this podcast or after reading the actual publication. So we appreciate you listening and I look forward to next time. Thank you.

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