The Market Changed Its Mind + The Year of the IPO – JPS Global Investments Newsletter

April 23, 2019

Dear Clients and Friends,

Stock markets across the world had a great start to 2019, with US stocks posting their best quarter since 2009. After the 4th quarter of 2018 – the worst quarter in 7 years – it was a welcome and surprising about-face. Interest rate sensitive investments like real estate and bonds did well too. If the end of 2018 deflated asset prices to account for worries associated with political uncertainty, trade conflict, a slowing China, and a Federal Reserve willing to increase interest rates, the beginning of 2019 showed a complete reversal of that sentiment.

Federal Reserve Chairman Jerome Powell’s decision to pause rate hikes was probably one of the main underpinnings of the stellar quarter. Personally, I don’t think he did it to please Trump who is strongly against rate hikes. Having seen him in interviews, he strikes me as a person who is not too shy to chart his own course. An independent central bank is important, in my view, because if the central bank becomes a puppet of the executive branch, it would no longer be able to objectively pursue low inflation and full employment. I am hopeful that traditional opponents of a strong and independent central bank now see why that independence is important. Another separation of powers, of sorts.

While the Fed was a tailwind during the first quarter, the issues that had investors worried have not receded. The trade talks are still ongoing, political risk is still high, China is still China and asset prices are pretty high across the board, while the economy is clearly growing slower. If trade talks see a favorable outcome and the employment picture and wage growth remain positive, markets could go higher yet, but there are few sure things in life and investment returns aren’t one of them.

2019 banner year of the pig

2019 is not only the Year of the Pig, there are others looking to get fat & happy in the Year of the IPO, with a robust crop of tech companies listing on the stock market. Some are predicting that 2019 will surpass the 2000 record, when IPO proceeds reached $96 billion. Regardless of how well these companies do on the stock exchanges, they will mint many new millionaires, especially here in the Bay Area. The feeding frenzy has begun with businesses lining up to line their pockets, providing products & services to the IPO-ed class. I was reading about a company that has been advertising its Greenland heli-skiing trips that take off from the deck of a yacht, drop you on pristine snow-capped peaks, and return you to the ship for an incredible dining experience. The weeklong trip goes for $800,000 per person. 

To be sure, most recipients of IPO shares will not blow all or any of their newfound wealth in Greenland and will seek to invest their money wisely and navigate the treacherous shoals of stock option exercising, tax planning, real estate purchases, and single stock risk management. Many financial advisors, realtors, accountants, insurance agents, lawyers, and other professionals will be eager to help; some more qualified than others.

In my years of working with tech employees, I have come across some key misconceptions time & again that can stand in the way of financial success. Following is a sampling of those. There are some pearls here for all of us, even those of us who don’t have the fortune of a big IPO haul:

It’s all or Nothing

“Should I sell my stock now, or wait until it hits $120, which people “in the know” are saying will happen for sure?” Almost a direct quote from someone who sought my counsel. Think probabilities. No one knows where the stock price will land one year from now. Assign some probability to a favorable outcome, some to a middle of the road outcome and some to a poor outcome. If you think there is a 25% chance of the poor outcome, you might consider selling or hedging 25% of your stock, if that’s possible and if the tax consequences are not too adverse.

Incentive Stock Options (ISOs) should be exercised and held for one year

people on scooters
Smiling all the way to the online bank

The misconception persists that it is always better to exercise and hold ISOs and sell them after one year to get favorable tax treatment. “Exercise and Sell” of ISOs is considered a Disqualifying Disposition and should be avoided, according to most. This is not necessarily true. The tax benefits of exercising and holding stock for one year might be less than assumed. If the stock price drops post-exercise, you ended up paying more in taxes on something that now has less value. Again, it is not an all-or-nothing proposition, you can do a combo of “Exercise & Sell” and “Disqualifying Disposition(s),” based on your personal circumstances. One size does not fit all.

My Company is Going places, I am not Selling

If your company is really going places, you might still want to sell some stock. The reason being, that your future compensation will improve with the company’s fortunes. You might get more stock, you might have unvested shares, future bonuses, promotions, etc. If you also have all your wealth tied up in the company, then if things go south, you might see fewer bonuses, promotions raises, maybe even lose your job and at the same time your wealth is diminishing because the stock is probably going down with the fortunes of the company. So think diversification and not having all your eggs in one basket.

I am Going to Sell my Stock and Look for the Next Hot Investment

If you have come into wealth by hitting the IPO jackpot, it can be hard to shift gears and look to diversify your assets and accept more modest returns rather than staking everything on the next homerun. Fortunes can be made by taking big risks, but they can also be lost that way. We tend to advise that clients dial back their risk and not bet the farm on the next big thing.

Truth be told, we are also excited at the prospect of serving new clients who benefited from the 2019 Year of the IPO. A lot of younger folks who for the first time have come into money are looking for more meaning with their investments. There are things they don’t want to invest in that are misaligned with their values and there are things they want to pursue that they feel are impactful. We think we can be of use on that front and look forward to helping them be the change they seek in the world.

What about buying the stocks after their IPO?

Each IPO-ed stock has its own future that has yet to be written. Some will do well, some will muddle through, and some will fall from grace. One thing that is for sure is that a lot of the outsized returns from these companies have already been earned before the stocks became public. What you can also be fairly sure of – if history is any guide – is that in the aggregate the 2019 IPO vintage is more likely to underperform the overall stock market than to outperform it over the next 3 years. So when you buy one, be sure to buy it on its own merits on not because it recently IPO-ed.


One that caught my eye, is Beyond Meat. This plant-based burger is not your garden variety garden burger. It is good for you, it is good for the planet – which really can’t afford to have another 2 billion people on an animal protein diet –, it tastes good, and for those who like burgers, it actually tastes like one. I will probably buy some shares for my personal account, though not on the first day as the odds are not good for that to be a winning proposition. Note that I am not recommending you follow suit and I have not analyzed the financials yet. What I am saying, is that if you really want to try a 2019 IPO stock, find one that you truly like and don’t bet the farm.

In my last letter I said I was cautiously optimistic about 2019. As soon as I sent it out, I realized I punted on my outlook. “Cautiously optimistic” is the default outlook of investment firms, not wanting to sound too pessimistic so as not to scare people, nor wanting to sound too optimistic in case things turn sour. I will also be mindful not to say “I expect stocks to return 8-10%” in the coming year. That may be the long-term average – which is why it is another default statement – but it is rarely the actual return in any given year. Sometimes it is more, sometimes a lot more, sometimes less, and sometimes a lot less. So what is my outlook? The best I can muster is that 2019 will be another non-average year with perhaps a storm or two. For that we are prepared and confident we can navigate through for our clients.

Wishing you a fantastic spring that gives way to summer and renewal of all sorts!



Jan Schalkwijk, CFA
 JPS Global Investments

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