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the next generation’s relevance to the financial market place

Khalid Reede Jones COO, General Counsel krj@thrasherfunds.com

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We are in an unprecedented era where the Gen X and Y set have more access to capital now than any other generation in history had at the same age, while at the same time, the savings rate in the US is at -1%, a low not seen since the Great Depression.  To put that figure in perspective, a -1% savings rate means that Americans are spending every dollar they make, and then spending another 1% of their salaries that they didn’t even make.  In other words, racking up miles on the credit card.

I believe that one of the primary explanations for the spending spree that this generation is on right now is because they are bombarded with marketing everyday to spend, buy and purchase.  Commercials and billboards and radio ads and storefronts and magazines and celebrities with their designer clothes and clothes designers that are celebrities themselves all send the same message: You need all this stuff!  At the same time, the investment companies, the companies that try to help people grow wealth, don’t yet view you as someone who is committed to building any yet.     

When’s the last time you’ve seen an investment commercial about you?

Think about the last investment commercial you’ve seen.  It probably involved a beach, a golden retriever, two full heads of grey hair, matching white linen outfits, bare feet and the word “retirement”.  When’s the last time you’ve seen an investment commercial about you? 

You want money too, although retirement is probably not the first thing on your mind.  The good thing is that it doesn’t have to be for you to start investing.  The bad thing is that if you don’t start soon, you’ll be one of those heads of grey hair watching the commercials about the future you could’ve had walking on the beach in your white linen suit, you know, if you’re into that sort of thing.  This raises an interesting question, however.  Do you and the rest of the generation not invest because you aren’t marketed to, or are you not marketed to because you don’t invest?  The answer is most likely somewhere in the middle and quite frankly is irrelevant because the effect is that you are being left behind. 

The good news is that you can invest without giving up your dreams of the new handbag or game console

The good news is that you can start investing without giving up your dreams of the new handbag or game console.  I know, you’re 32, but you still want the Playstation 3.  Whether you really “need” or just “want” the new Marc Jacobs bag or the XBOX 360 Elite Package is really not a conversation that needs to be resolved right now.  I’ll let your parents give you that hassle, and honestly, I want you to have it if you want it, but what I also want to do is make you think about how you can use what you know about those companies to try to make yourself money from and not just for your favorite companies and others.  Your knowledge of Marc Jacobs gives you some insight into the world of Louis Vuitton (parent company to Marc Jacobs) as a company and your knowledge of the XBOX gives you some insight into Microsoft (maker of the XBOX 360).  The result is that often times, you know what’s hot before it’s mainstream.  You know what’s falling off before it happens.  The reason is because you make things hot…and not.  And many times, when you say it’s hot, that means something in the stock market whether you realize it or not.  

12 of the 15 brands most trusted by Generation Y are publicly traded or the subsidiary of a publicly traded company

For anyone who thinks that the “consumer” generation has no say on the market, check this out.  In May 2007, Outlaw Consulting, a consulting firm with a focus on Generation Y’s impact on the consumer marketplace, released the results of their survey on Generation Y’s 15 Most Trusted brands.  The list goes as follows:

1. Apple
2. Trader Joe’s
3. Jet Blue
4. In-N-Out Burger
5. Ben and Jerry’s
6. Whole Foods
7. Adidas
8. American Apparel
9. Target
10. H&M
11. Levi’s
12. Volkswagen
13. Converse
14. Vitamin Water
15. Red Stripe

The first surprising thing that Wall Street types should take notice of from this list is that this list of the 15 Most Trusted Gen Y brands spans a diversified array of investment industries including Personal Computers, Textiles, Apparel, Grocery Stores and Discount Variety Stores.  The second is how global in reach the list is.  While “globalization” may be a term created by the Boomers, the Post-Boomer generations are true testaments to the flatness of the world, and it shows as 5 of the 15 names on the Most Trusted list are international brands or the subsidiary or brand of an international company.  The third item of note from the list, maybe more surprising to the under 30 crowd than the over 30 crowd is how many publicly traded companies were considered “Most Trusted” by Gen Y.  When the private companies from the list are removed the list looks like this (Ticker symbols in [ ]):

1. Apple [AAPL]
2. Jet Blue [JBLU]
3. Ben and Jerry’s (subsidiary of Unilever [UL])
4. Whole Foods [WFMI]
5. Adidas – [ADDYY.PK]
6. American Apparel [EDA]
7. Target – [TGT]
8. H&M – [HMRZF]
9. Volkswagen [VOWG.DE – Traded on the German Exchange]
10. Converse (bought by Nike [NKE] in 2003.  Didjya know that?)
11. Vitamin Water (created by Energy Brands which was bought by Coke [COKE] in 2007.  Yes, 50 Cent did make over $100 million in that deal)
12. Red Stripe (Manufactured by Guiness USA a subsidiary of Diageo [DEO])

12 of the 15 brands listed as Most Trusted by Generation Y are either publicly traded or owned by a company that is.  That means that this generation, using the same marketplace that is available to everybody else could have an ownership stake in 80% of the brands they trust most.  

The most interesting revelation from the Most Trusted list is the performance of the portfolio consisting of Gen Y’s most trusted publicly traded companies.  If you created a portfolio from the list from above, you would have a portfolio (let’s call it the “Gen Y Most Trusted Fund”) that looked like this:

1. Apple [AAPL]
2.  Jet Blue [JBLU]
3. Unilever [UL]
4. Whole Foods [WFMI]
5. Adidas  [ADDYY]
6. American Apparel [EDA]
7. Target [TGT]
8. H&M [HMRZF]
9. Volkswagen [VOW.DE]
10. Nike [NKE]
11. Coke [COKE]
12. Diageo [DEO]

In the year preceding the Outlaw Consulting survey, the Gen Y Most Trusted Fund stocks performed like this:

1. Apple [AAPL]                            +69.12%
2.  Jet Blue [JBLU]                         +10.51%
3. Unilever [UL]                             +44.17%
4. Whole Foods [WFMI]                  -40.80%
5. Adidas  [ADDYY]                       +22.62%
6. American Apparel [EDA]              +55.30%
7. Target [TGT]                              +17.33%
8. H&M [HMRZF]                         +76.82%
9. Volkswagen [VOWG.DE]+102.16%
10. Nike [NKE]                                +33.88%
11. Coke [COKE]                             +14.49%
12. Diageo [DEO]                             +31.9%

AVERAGE:                                  36.46%

S&P 500:                                     19.08%

For the calendar year before the release of the survey, the “Gen Y Most Trusted” fund would have returned an amazing 36.46%, almost double the result for the S&P 500 during that same time period.  This means that the collective brand loyalties of Gen Y, when applied to the stock market were reasonably diversified and almost twice as good as the broad market as a whole.  The point is not that every company or brand that Post-Boomers think is cool makes a good stock.  The point is that there is something inherent in the way the group operates that has an impact on the market that can be used to turn waste into wealth and allow you to expand your knowledge of the brands and companies closest to you to the vast landscape of companies that make up the stock market.  In other words, you can use your knowledge of companies like Apple and Nike as a gateway to helping you learn how to assess companies like GE and Sanofi-Aventis

The results of the backtested Gen Y Most Trusted Fund are simultaneously miraculous and entirely plausible.  The reasoning is quite simple – try to follow.  The stock of companies that make money generally (although not always) go up.  Generations X and Y are the target audience of the vast majority of the companies on the Most Trusted list.  Generations X and Y are also the largest consumer oriented, brand associated groups.  Therefore Generations X and Y have a lot to do with which companies make money and conversely, which stocks have a tendency to do well. 

You love Your brands, I know.

I just want to help them love you back.  So, consider this as one battle cry in a call to arms for a new generation of investors not yet fully engaged by Wall Street, yet invaluable to the market’s long term vitality.  You are the Next Investors, the approximately 64 million between 18 and 34 who wish they knew how to take advantage of the market and their financial futures.  The manner of thinking I talk about in this article is the same type of thinking we use in our own company to make investment decisions along with financial analysis that only sounds really hard when they talk about it on TV.

What the list provides is a new way of thinking about the market for the new market demographic with a nod to Peter Lynch

Look, I’m not telling anybody to read this list, sign up for a brokerage account and start buying stocks just because they bought a new iPhone.  What the list provides is a new way of thinking about the market for the new market demographic, by the new market demographic and one that makes the financial markets relevant to you, since you’ve already shown yourself relevant to the markets.  Some of these names will be near and dear to your heart, like Whole Foods and Nike.  Others will be less familiar, like Diageo and Unilever, but no less a part of the wholly integrated millennial lifestyle.  This generation set the trends, and trendsetting is hard work.  You deserve a break, so take it now, lie back, and feel a little bit richer every time you turn a page.  You are the Trend Generation, the Style Generation, the Next Generation, so use it to your advantage, because while trends come and go, making money never goes out of style.