Going All In - The BECKY ETF Explained

What's up, Graham? It's guys here. So, as much as we love to say that time in the market beats timing the market or index funds outperform 96 percent of actively managed investments, let's be real. Deep down, there's a small piece in all of us who wants to be that fraction of a percent who knows how to consistently beat the market and drive Lamborghinis all day. Well, you're not busy chartering yachts off the coast of Bermuda.

Okay, but seriously, just hear me out. Two weeks ago, I came across a user on Reddit who developed his own stock market cheat code to figuring out how to consistently beat the market, and I gotta say, his information is a gold mine. Previously, he determined that most of Jim Cramer's recommendations have lost money. Congress slightly outperforms the S&P 500. Financial analysts can beat the market, but charge too much money to do so. Then, Michael Burry is almost always wrong. But that was just the tip of the iceberg in terms of what's to come, because after all, if a blindfolded monkey could outperform even the best hedge funds, then chances are you can too.

But before we start, full credit goes to the Reddit user Knob Jobs for providing this information and helping out behind the scenes to put all of this together. I'm just a fan of his research. I appreciate his attention to detail, and I sincerely see value in his analysis that he spent the last year putting together. I'll link to his information down below in the description for anybody who wants to check out his work. So thank you guys so much. Make sure to destroy the like button, and also big thank you to Policy Genius for sponsoring this video, but more on that later.

Alright, so we should start off with one of the most requested topics first, and that would be how much money you can make by investing in IPOs. If that's not familiar, an IPO is what's known as an initial public offering, where a company trades openly in the stock market for the very first time. As we could see statistically, many of them end up doing quite well. For example, in 2020, IPOs saw an average single-day gain of 36 percent, and even dating back to 2008, IPOs as a whole have never posted an average loss on the first day. So could this be a viable investment strategy to make a lot of money?

Now, before going into these findings, it's really important to mention that with IPOs, there are two very different prices that need to be tracked. The first is the IPO price, which is the price being offered to brokerages and institutional investors. The second is the price it begins to trade right at the moment it becomes public.

She has just explained, when a company is about to IPO, they use a brokerage to properly price and allocate the shares accordingly. A lot of the time, the brokerages will give their own clients the opportunity to buy up IPO shares first before the retail frenzy gets to gobble up the leftovers. And that's why the IPO price and the price it actually opens at could be two totally different numbers.

So to accurately track what does well and what does not, Knob Jobs looked to two situations: one, what if you invested in IPOs at their original price, and two, if you invested in IPOs the moment they hit the open market for all the plebs to buy like you and me? Well, it was found that if you were able to buy in at their original asking price, 68 percent of IPOs did go up in value the moment they hit the market, with an average return of 12 percent from 2000 to 2020.

And within a day, over two-thirds of IPOs saw an average increase of 13.6 percent. That's not too bad, and if you're all about the numbers, investing in IPO shares at their original price could be a great way to beat the market short term. However, if you're the average retail investor buying in the moment it becomes public on the open market, things are not looking so good.

That's because, as investors go nuts over the hype and excitement of new fresh blood in the stock market, that demand instantly pushes up the price, which is why you'll sometimes see an IPO set at 100 dollars a share, but the moment it becomes available, it's now 115 dollars. Well, in that case, only 48 percent of IPOs saw a price increase had you just bought in as soon as it was publicly available, and that average gain was only a modest 1.3 percent, meaning most IPOs lose money in the first day if you're an average retail investor, and the extra juice is just not worth the squeeze.

But I wanted to take this a step further and see how well did these IPOs perform long-term, and is there a meaningful difference outside just the first day? Well, over three years, it was found that 64 percent of IPOs were underperforming the overall market by more than 10 percent, although the few that overperform do so quite a large margin, at times more than 300 percent. A study by Jay Ritter also found that over 20 years, the biggest influence to an IPO was not so much profitability or marketing, but instead how much they were selling.

In this case, companies with more than 100 million dollars a year in sales did considerably better than those with less. Now, part of this could be that stronger sales are an indication of stronger demand to push the company forward, but overall, it really just comes down to this: more often than not, IPOs lose money, and as a retail investor, you should probably stay away. However, if you have access to IPO shares before they go public, well then, enjoy those sweet, sweet profits because statistically, they're going to be worth more in the short term, allowing you to effectively beat the market.

So if IPOs can't beat the market unless you buy in prior to them being listed, what about the Warren Buffett strategy of buying into the most respected brands in the entire world like Nike, Coca-Cola, Apple, Disney, and so on? Well, Knob Jobs put that theory to the test in his never-ending search of finding unique ways to beat the market, and this is what he found. He started by analyzing the companies within RepTrack, who over the last two decades ranked their top 100 companies to study throughout more than 240,000 respondents in more than 15 countries. But since we only want the best of the best, he used a sample size of only the top 10 companies who appeared in the list throughout the last decade, beginning on April 1st after this data was published.

And I gotta say, this information is amazing. Over one year, on average, those 10 companies outperformed the S&P 500 by nearly one percent. Over three years, that increases to 3.6 percent. Over five years, it's 16.2 percent, and until the date, those most reputable companies have seen more than a 50 percent higher return than the S&P 500.

Of course, he does realize his own limitations with this analysis, namely that he only takes into account 10 years of data when in reality, we should probably take into account more like 30 to 40 years to accurately come to a conclusion. The second, these are not risk-adjusted returns, which means you'll experience significantly more volatility, and there's still not the guarantee that these results will continue in the future. And third, this is a perfect example of how public perception absolutely influences the performance of a company.

Like, as another example of this, we have what's called the Becky ETF. Yes, this is a real, real thing, and yes, it's also doing insanely well. Just hear me out. This index focuses entirely on what they call overpriced lifestyle brands catering to a female audience, since Inc.com mentions that women make up 70 to 80 percent of all consumer purchases.

Now, this may have been started as a joke, like the chat index, but it's still doing well. The Becky 10 includes Adobe, Apple, Chipotle, Etsy, Facebook, Lululemon, Netflix, Pinterest, Peloton, and Shopify, while their small caps also feature Bumble, Elf Beauty, Starbucks, Target, and Restoration Hardware. In the last five years, it's up over a thousand percent. Now compare that to the chat index, which features Nike, Ralph Lauren, Under Armour, Dick's Sporting Goods, and Anheuser-Busch, which have also outperformed the market over the last 10 years.

So basically, the point I'm trying to get at is that brand recognition is a major influence in terms of how likely we are to use a product, and from there, those companies tend to have higher returns during the time, as noted by Knob Jobs. Although on top of that, we should still take this a step further, because if the most reputable brands outperform the S&P 500, what about the best places to work for?

But before we go into that, we're nearly at the end of the year, and what's even spookier than Halloween is still not having your life insurance coverage. And thankfully, our video sponsored today, Policy Genius, is there to help. Policy Genius makes it easy to compare quotes from over a dozen top insurers, all in one place, and you could save 50 percent or more on life insurance by comparing quotes with Policy Genius.

Now, I get it. Insurance is never something you want to think about needing, but as we approach the end of the year, now is the time to make sure your loved ones are financially taken care of in the event something happens. And Policy Genius makes that extremely easy to do. First, head to policygenius.com/Graham, and then in minutes, you can work out how much life insurance coverage you need and compare personalized quotes to find your best price.

Then, when you're ready to apply, the Policy Genius team will handle all the paperwork and scheduling for free. And best of all, Policy Genius never sells your information to other companies. They don't add on any extra fees, and their licensed insurers work for you and not the insurance company. So head to policygenius.com/Graham to get started right now.

And with that said, let's get back to the video. Alright, so now that we've covered the return of the most recognized sizable brands, Knob Jobs also analyzed the returns to the best companies to work for, because after all, if they have the best employees, then maybe they're also making more money, or do they? To test the theory, he analyzed the top 100 companies to work for, as ranked each year by Fortune, through an anonymous survey of more than half a million employees.

The thought is that employees would do their best work when they're happy, and companies with a healthy work culture would attract the best talent or have the cash flow to pay for that top talent, which in turn should translate to more investor profit. But since this list comes out once a year, Knob Jobs found two ways of calculating this data. First, you invest in this company as soon as this information comes out, and then you hold it for a year, or second, you invest in these companies and simply hold them until present day, regardless of how the company culture changes over time.

Well sure enough, after one year, the top 100 best places to work beat the S&P 500 by nearly one percent on average. That return increases slightly if you limit your investments to the top 50 or top 10 places to work, and if you had only invested in the best place to work, you would have seen a 10 percent higher return than the S&P 500 on average. In over 10 years, that difference continues to magnify. The top 100 best companies to work for outperform the S&P 500 by 18.8 percent, the top 50 by 26.6, the top 10 by 33.9 percent, and the best by 131 percent.

Knob Jobs even went so far as to break down that return every single year as compared to the S&P 500, and 80 percent of the time those companies outperformed over a decade, with the remaining 20 percent barely even lagging. Now it's important to mention that even though I think this is a fantastic analysis, my biggest concern is that the best places to work over the last decade were predominantly tech, and that entire industry has seen a tremendous run-up throughout the last 10 years.

It would be almost like comparing the S&P 500 with the tech-heavy NASDAQ and pointing out the fact that it outperformed over a decade, even though that doesn't mean it's always going to outperform in the future. But from the way I see it, tech has the extra capital to hire better talent, which in turn leads to happier employees, which in turn leads to higher profit, which benefits investors.

So, yes, I would say that according to this, these companies do beat the market. But for me, I worry it's a bit like the tail wagging the dog, and as interesting as it is, I'm not sure how well this would hold up over the next 30 to 40 years to gather enough data to come to a concrete conclusion.

Although finally, here's the most interesting from all of this: how well do hedge funds beat the market, and can it be possible for them to consistently outperform over a long period of time? First of all, before we dive down this rabbit hole, it's really important to understand what a hedge fund is and their importance for investors who want to feel superior to all the peasants out there trading away on their silly little Wall Street bets. Anyway, hedge funds are companies that make investments on behalf of wealthy people who typically have anywhere from five to twenty million dollars at minimum to deposit.

They also might include the investments of pension funds, banks, or insurance companies, and many of them are ranked based on their past performance in relation to the overall market. Now, hedge funds are not cheap either. CNBC recently reported that the average hedge fund charges a 1.6 percent management fee on your total capital along with the 16.4 percent performance fee for all the money they make, which is astronomically high.

Although the goal of this could be twofold: number one, generate a higher return than the overall market, and number two, don't lose money in the event the market goes down. Or in other words, they could hedge their position, trade as needed, and create a more predictable return for their investors in the short term. But do they actually do that? Well, Knob Jobs was up to the test, so he looked through the Barclay Hedge Fund Index that calculates the average return of 5 to 878 hedge funds dating back to 1997.

Well, on the surface, during this time, hedge funds wound up underperforming the S&P 500 by roughly 200 percent in both a 10 and 20 year time frame. From 2011 to 2021, the S&P 500 performed 265 percent better than the average actively managed fund. So the question then becomes why? Well, the simple answer is risk management. A hedge fund's goal is not to always outperform the market to make these crazy wild returns, because let's be real, to do that takes substantial risk.

And for large endowments, insurance companies, and wealthy individuals who want to preserve their wealth and grow it slowly, a hedge fund is a way to do that on a large scale. For example, there might be a hedge fund out there for wealthy individuals who simply want to maintain their capital and grow it to three percent without any crazy fluctuations. Or maybe there's an insurance company out there who wants to prevent their big pile of cash from losing too much value in the event the market goes down. Hedge funds are meant to be multipurpose, and strong returns could certainly be a part of that, but not necessarily the entire pie.

As Knob Jobs pointed out, hedge funds typically perform fairly well during a time where the market falls, like during the dot-com bubble, where hedge funds still managed to post consistent profits. In fact, in terms of volatility, the S&P 500 experienced roughly 14.9 percent, well, the hedge funds only saw about 6.79. So for those investors who want a more stable, consistent return, a hedge fund might be a way to do that.

Now, the counter to this is that because hedge fund fees are so ridiculously high, and nearly 20 percent of your profits are eaten up by a hedge fund manager who is able to structure that as a long-term capital gain to avoid paying taxes, even those wealthy investors would still be able to get a safer return by investing in a broad basket of index funds throughout less volatile stocks and bonds, and basically getting to achieve the exact same thing without having to give up an extra 20 percent of profit.

So in turn, I would basically summarize a hedge fund like a financial advisor who aims to achieve the stability and returns that you want without needing to maximize profits, even though the hedge fund manager might maximize their own profits. But overall, across the board, hedge funds do not beat the market because that's not what they were designed to do.

We're basically in short, it does seem like there are viable factors that would lead to higher than average returns, including brand recognition, happy employees, and buying IPO stock before it's publicly traded. But by and large, those theories are still not tested for more than a few decades during a time where tech dominated the market, and that has the potential to slightly skew these returns.

So for most individuals, it's still probably the best idea to ride the overall index as a whole and then invest a smaller amount in individual stocks if you have the appetite to try to beat the market. But I'm a firm believer that the more we know and the more analysis we could add to our research, the closer we could get to identifying why some companies do so well and to be able to predict patterns between them.

Again, big thank you to Knob Jobs for compiling all of this information, and again, he is not paying me to say any of this. I'm just a fan. I find his analysis incredibly interesting, and I would literally read this stuff for fun over the weekend because I am that into it. So even though he didn't ask me for anything in return, I will link to his website in the description for anyone who wants to follow what he's done.

So with that said, you guys, thank you so much for watching. I really appreciate it. As always, make sure to destroy the like button, subscribe button, and notification bell. Also, feel free to add me on Instagram and my second channel, The Graham Stephan Show. I post there every single day I'm not posting here, so if you want to see a brand new video from me every single day, make sure to add yourself to that. Thank you so much for watching, and until next time.