It's time to praise individual stocks. I know we are in a world where 50% of all new money goes into index funds. We all know that index funds have beaten most individual money managers over the long haul - especially the hedge funds because of their high fees. I embraced index funds wholeheartedly when I was an active manager and I beat the market pretty severely, 24% after all fees versus 8% for the 14 years I worked as a money manager and much more than that when I served as an adviser.
But on a day like today, where the averages did nothing, of perhaps the biggest IPO run in the history of the stock market, where about a trillion dollars of companies are about to come public, I want to talk about the goodness of owning stocks with your Mad Money.
I want to start with Lyft. In 24 hours there are some lucky people who will get some shares of Lyft and if all goes as planned these people are going to hit their own version of the lottery. No, it won't be like Powerball which is compelling but with ludicrous odds against you.
But simply because you have been a good client you are going to get rewarded far more than you do when you are in any affinity group, from Panera and Starbucks (SBUX) to Kohl's (KSS) cash and Ultamates. We are not talking points. We are not talking birthday presents. We are talking about the prospects of what may be as much as $20 on say, 200 shares if you have been a good customer.
Now in an era where a year of a private college costs as much as $76,000 - and that's before you bribe the field hockey coach - just kidding! - I would take $4000 in cash any day of the week.
You see, when the late John Bogle, the father of the index fund, would preach endlessly about the need to be in a low cost fund, I always wondered whether he thought about the bountiful moments in this business where you can buy something and it pops, it goes higher immediately and you got stock because you have been a faithful client of a good firm.
Oh there are brief deals where this happens. We have seen some of the cloud stocks pop dramatically when they came public. We all remember Twitter (TWTR) and perhaps we recall the disaster that was Facebook (FB) where you still could have made money if you flipped it.
But it's been ages since household names companies are coming public and one of the dirty little secrets if the beginning of the gauntlet is that it's like that fabulous Clint movie of the same name where initially it's pretty easy going but it heats up very fast.
You see the brokers want to entice you into the casino. They know if they can price the merchandise at a lower price than there is real demand, and if the syndicate desks that parcel out stock constrict the supply and don't get too aggressive on price, they can engineer a beautiful pop that will beckon more people to put in for the next deals.
As we go through the Gauntlet the deals will get sloppier and sloppier until there are some real doozies but because of the household names, especially Uber, there will be some new retail money come in to make things work out.
So that's the IPO side of things and I think it is joyous when you can make money for doing nothing other than being a good client. Oh, and for the record, in my time at Goldman Sachs I saw so many individuals beat the market that I couldn't believe there would be those who settle for owning both mediocre stocks and good ones in that basket of 500 equities, but I have long since given up the stance that you should avoid index funds.
Instead I embrace them but would like you to own some individual stocks side by side that you buy and sell, that you can control when it comes to paying the tax man and that you choose because of your curiosity and your homework.
Let me explain this process to you, something that's a combination of what I was taught by frequent CNBC guest David Darst who was my oracle when I worked at Goldman Sachs, and Peter Lynch, the former manager of the Magellan Fund at Fidelity who wrote the best single book on investing, One up On Wall Street, How to Use What You Already Know to Make Money in the Market.
David tried to get you to look around, to talk to everyone, taxi drivers, passengers on a train, passerbys, people in elevators. Peter Lynch said that you need to buy stocks of what you like after you have done some homework to be sure the company is doing well and it isn't just based on what you see alone. In the old days, when Lynch's book came out, in 1989 it was hard to even score the annual. Now there's a gigantic amount of information available, so the book is even more relevant.
Could you have spotted PVH, with a stock that's up $17.50 or 15%? I would argue that the answer is yes. Here's why... First, Calvin Klein and Tommy Hilfiger are fine brands. I wear their jeans and their shirts and pants all the time. Europe is great for them and when I rented a house down the block from the Tommy Hilfiger on Kurfurstendamm, the Madison Avenue of Berlin, there was a line to get into the store every morning. I tried to talk to those in line but it was a United Nations affair and no one spoke English. That's a good sign. More important CEO Manny Chirico has come on Mad Money every quarter for ages and ages. If you caught his previous appearance you would know he was very unhappy with the one division that caused a shortfall. He was emphatic that would not happen again. I have said over and over again that Manny's as bankable as they come and if he said he would fix the problem he would fix it. That's just what he did. You had to trust Manny and there was no reason not to. You could have gotten this move.
We own the stock of Five Below for my charitable trust which you can learn about by joining the Action Alerts PLUS club. Why do we own it? Because I have been to the one near me with my daughter when she was younger and it's a blast. In Peter Lynch's book he talks about if you spot a concept that you think works and it is only in a few states but is expanding nationally you should own it. We got the CEO Joel Anderson on recently and with the homework I did and the presentation he made, I thought it was a must buy. Lulu? It's my wife's favorite place. I have visited four of them in the last year. They are all electric. I work out in the stuff every day. So does my wife. Matt Boss, the unbelievably good retail analyst from JP Morgan has been writing endlessly about how well LULU is doing. Was the $21 gain, a 15% return attainable?
I would argue that anyone who swears by it and read some research might very well own the stock.
Now, we know that stocks can be very risky. But we also know if these had gone down you might have just bought more if your longer-term thesis is intact.
So here's my takeaway. Starting with Lyft, individual stocks are going to make a comeback. I sense the excitement and the possibilities. But don't leave it to just the IPOs. There's something good going on here. Cash in on it.
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