When Massive Private Companies Go Public | Rational Reminder 406

0:08 This is the Rational Reminder podcast, a weekly reality check on sensible

0:11 investing and financial decision-making from three Canadians.

0:14 We are hosted by me, Benjamin Felix, chief investment officer, Dan Bordotti,

0:17 portfolio manager, and Ben Wilson, head of M&A at PWL Capital.

0:24 Good to be back.

0:25 Yeah, good to be back.

0:26 It's episode 406.

0:29 and exciting to to get into the the main

0:32 topic later today which or later on this uh episode.

0:36 Um but before we get to that, uh exciting news that many

0:41 people have probably already heard by the time uh this episode's coming out,

0:45 but PWL made um a pretty cool acquisition in Vancouver, BC.

0:52 Uh we partnered up with the McDonald Shimco and Company team out in Vancouver.

0:57 So we now have a great team out there and officially a PWL office space.

1:02 So as we continue to grow and find likeminded advisors that are

1:08 implementing a similar philosophy and and financial

1:11 planning driven approach to their clients.

1:14 We are expanding our presence across the country

1:16 and and this is a a great team to be partnered with.

1:21 It's a pretty well-known financial planning firm's been around

1:24 for a long time and pioneers in that industry.

1:27 Uh specifically like fee only planning I think originally right um so y

1:35 exciting to have them on board

1:37 fee only planning pedigree and they

1:38 they've they went into u portfolio management

1:42 and and on that side of the business they're

1:43 super super aligned with the way that PWL operates.

1:46 You said Pioneers, Dan.

1:47 I was going to say OG's, but you know, same.

1:52 Yeah, they're they're one of the one of the oldest financial

1:54 planning firms uh around and have been been in business

1:58 for for a very very long time and they've been

2:01 super involved with moving the financial planning profession in Canada forward.

2:05 Uh yeah, very cool to have them part of our team.

2:08 Yeah.

2:09 Yeah.

2:09 And they've actually some of the early founders were

2:11 part of kind of creating the RFP designation which

2:15 is the registered financial planning designation which is now

2:19 become known as a almost a step above the CFP.

2:22 The CFP is a a prerequisite and it's kind

2:25 of elevating the prof profession to a higher advanced planning level.

2:31 Yeah.

2:31 Yeah.

2:31 The RFP is a more advanced kind of version of the CFP,

2:36 I guess, but it's a it's a IFP, who issues the RFP designation,

2:40 is a very cool organization that, as you said,

2:43 McDonald Shimco has been heavily involved with, as was one of PWL's founders,

2:47 Tony Leighton, back in the day.

2:50 Anyway, so just very cool to partner

2:52 with these guys and and makes a ton of sense, I think, for for both firms.

2:57 Okay.

2:57 So, just in the spirit of kind of PWL's growth

3:00 and what we're doing on the M&A inorganic growth side,

3:04 we're trying to build up what

3:06 we're calling an integrated wealth management firm,

3:08 which is a bit unique in the independent space in Canada in particular,

3:13 but we're trying to kind of focus on the idea that markets work and planning

3:17 matters and trying to find like-minded partners

3:19 that are looking to be part of something bigger.

3:22 So, we have started a monthly

3:24 webinar series that's primarily directed at advisors.

3:28 Uh, by the time this episode comes out, the next one is slated for May 26th.

3:34 Uh, so keep an eye out for news on on that episode.

3:38 But those those webinars are kind of centered around the what's

3:41 your next chapter exploring what might be possible how PWL's model

3:45 might be different and just looking at what you might want

3:50 to consider through your succession options and and again just be curious.

3:58 It's always important to think ahead to your succession plan even

4:01 if you're not ready to to make that move in your career.

4:04 Seems like a pretty good opportunity for adviserss to talk to a group

4:07 of people that have spent a lot

4:09 of time thinking about practice management and succession.

4:12 Yeah, and they've always been great discussions so far.

4:14 We've we've already done a few of those and been lots of engagement,

4:18 lots of great questions and people just curious

4:21 to learn more and and that's all it's about,

4:23 making connections and and learning from each other.

4:27 Awesome.

4:27 Cool.

4:29 All right.

4:29 Should we jump into the main topic?

4:32 Yeah, let's do it.

4:36 So, I I did a a video on this topic and the the title was kind of aggressive.

4:40 I don't know.

4:42 I don't know if we'll call this episode the same.

4:44 Very out of character very bad.

4:46 That one we called the the mega IPO grift.

4:49 Um anyway, that's roughly what the topic is.

4:52 It's just about some of the big IPOs

4:55 that are coming down the pipe here potentially.

4:57 Um uh if if people who watch my YouTube

5:00 channel may may be thinking that this is going to be a a repeat of what they saw

5:05 on my channel and a lot of it is similar content.

5:07 Uh but I do have some new information to add

5:10 to this episode discussion uh on a few points.

5:13 I I had some emails with professor Jay Ritter

5:16 and got some interesting new data points and I also talked

5:19 to the folks at Avantis about how they handle IPO

5:23 inclusion which is actually different from how Dimensional does it.

5:26 I mentioned dimensional in the video, so that's interesting,

5:30 but we'll get to that in a minute.

5:32 Uh, so the main the main issue here, and I saw this coming up a lot online,

5:36 which is why I thought it made sense to make a video about it.

5:39 The main issue is that some massive private companies are set to go public soon.

5:44 So, we've got like SpaceX, OpenAI, Anthropic, there are a few other ones,

5:49 uh, Data Bricks, uh, a couple others as well.

5:53 And these are private companies that would rank

5:56 among the largest public companies if they were public.

6:00 And the the the interesting thing is and the relevant

6:03 thing is for people who think like us and invest

6:06 like us uh us meaning using you know just buying

6:11 buying the market basically uh at least as a simplification.

6:15 Uh the implication here is that if those companies

6:18 go public and get included in an index, uh if you are an index fund investor,

6:25 you're you're going to end up potentially buying some of these companies

6:29 when they go public whether you like it or not.

6:32 I think there are lots of other issues around this too,

6:33 like separate from the investment thesis, some people don't like the idea

6:38 of investing in certain companies for other reasons.

6:41 We won't get too much into that, but in in any case,

6:44 the issue is that index funds buy

6:45 these stocks if they get included in the index.

6:49 Now, one of the issues with IPO inclusion, and we've done episodes,

6:54 at least tangentially related to this, although in some

6:56 cases directly related to this in the past,

6:59 is that IPOs tend to be pretty terrible investments.

7:02 uh and these ones in particular, these big, you know,

7:05 SpaceX and and OpenAI, uh raise some, I think, pretty interesting questions.

7:11 So, we'll we'll talk through in this episode how

7:16 stock indices and the index funds tracking them include IPOs,

7:20 which is a whole interesting thing in itself.

7:21 How do the different indices include them?

7:23 How that might affect index fund returns and what investors can do about it?

7:28 Uh, we'll also cover whether index fund

7:31 investors are missing out on private market returns,

7:33 which I think is a really interesting

7:34 topic and a common perception based on companies

7:37 like the ones we're talking about staying

7:39 private longer and getting bigger in private markets.

7:42 Uh, okay.

7:44 That's that's the setup.

7:44 You guys have any comments before I keep going?

7:48 Well, we got into that one in a pre Sorry, Ben.

7:50 We got into that uh question about whether index fund

7:53 investors were missing out on private markets in a previous episode.

7:58 Fairly controversial topic.

8:00 Um some smart people disagree on it.

8:03 But uh yeah, I guess now we're kind of looking at the opposite is that is

8:08 there a portion of the market that index

8:09 fund investors might want to recuse themselves from?

8:12 And we'll see where that goes.

8:16 Yeah.

8:16 Yeah.

8:16 I I think this is also a fascinating

8:18 example of how different changes in the markets

8:21 can impact investor behavior which we'll we'll

8:24 be commenting on throughout the episode as well.

8:27 For sure.

8:28 And this it's always like people want to find the problem

8:32 with index funds and I mean we've there are problems with index funds.

8:36 We've talked about them on on this podcast in the past.

8:38 In general though, they're they're great investments because they just

8:41 they deliver the returns that the stock market has to offer.

8:44 Uh that doesn't mean that they're perfect and the pieces

8:47 where they're not perfect are always interesting to talk about.

8:50 Um but I think index funds are still great investments,

8:53 but people love to find like that that thing

8:55 like oh this is the this is the thing.

8:57 This is finally the thing.

8:58 This is the thing that breaks index funds.

9:00 I don't think this is that.

9:02 I'm not that worried about this but I

9:04 do think it's a really really interesting topic.

9:06 Um, so the main issue is that because

9:09 their primary role is representing the stock market,

9:13 some indices aim to include new IPOs soon after the company goes public.

9:17 Now, you got to think if if the purpose

9:20 of of the index is representing the stock market,

9:24 not being a great investment, whatever, whatever.

9:26 It's like our goal.

9:27 We are the index.

9:28 We're representing the stock market.

9:30 That makes perfect sense.

9:31 You should include IPOs.

9:32 I mean, ideally, in an ideal world, they world,

9:35 they get included immediately as soon as they're as they're listed.

9:39 Um, but the the the problem or or the the the nitpick at least is that uh

9:46 uh IPOs have had historically terrible returns if

9:49 you invest in them soon after the IPO.

9:53 If you own private company shares before the company goes public,

9:56 there tends to be a first day pop.

9:58 So, that can be kind of nice.

9:59 Um, but if you buy on the secondary market once the company's trading,

10:04 the returns on average historically have been pretty terrible.

10:07 So, we we'll come back to that later

10:08 with some interesting data just on IPO returns.

10:12 Uh, but just to bring it back to index funds,

10:15 index funds today control trillions of dollars.

10:18 I mean, there's one there's one Vanguard fund with $2 trillion of assets in it.

10:23 It's a dual It's an ETF, mutual fund, share class, one of those funds,

10:26 but $2 trillion between the two share classes in one fund.

10:31 Like, that's that's a wild um huge number.

10:35 It's it's right.

10:36 It's crazy.

10:37 Uh now if you're a company listing on the stock market or if

10:40 you're an investment bank facilitating an IPO

10:43 getting the stock included in a major index or multiple indices even better can

10:48 mean huge investment dollars flowing into the shares

10:51 of the company on public markets because index funds are forced to buy.

10:55 Now what does that do?

10:56 Well it increases the price probably and well we know

10:59 that it does from some of the data we'll talk about.

11:01 It gives sellers liquidity and yet it increases the the share price.

11:07 So if you're the company or uh involved with taking the company public,

11:11 index inclusion is really desirable for shareholders, for the company,

11:16 but the the group that it's not so great for is

11:20 is the index fund investors who are potentially left holding the bag.

11:26 Now, it tends to be a small portion of the index that we're talking about here.

11:30 So, it's a it's a tiny little bag,

11:31 but it's still a bag that they're left holding.

11:34 Um, yeah.

11:35 So, that's that's uh that's the an interesting thing to think about.

11:39 So, why do we see this happening?

11:42 Companies and this this doesn't have

11:44 to be an irrational inefficient markets thing.

11:46 Like Lubos Pastor has a paper that I'm pretty sure

11:48 we talked to him about when he was on our podcast.

11:51 There there are rational reasons for there to be waves of IPOs.

11:54 companies go public basically when they think they can sell their stock

11:57 at a high price which doesn't

11:59 mean anything inefficient or irrational is happening.

12:01 It's just that's for for whatever reason their company

12:05 has a high stock price at that time.

12:07 But that means for the public market investors when these companies

12:10 go public they have by their own evaluation a high stock price.

12:16 Um, so public market investors in buying the stock in the secondary

12:20 market get the opportunity to invest in these companies when they're,

12:24 you know, if we wanted to use the word overvalued.

12:27 Here is where we would use it.

12:29 But at the very least,

12:29 we could say when they have low expected returns is when you get to to buy.

12:36 Any any comments before I keep going?

12:40 It's, you know, this is really, it kind of gets to the heart

12:44 of the fundamental reason why index funds were created.

12:48 And you touched on this, right?

12:49 I mean, the whole point of the index fund is not to be arbitrary,

12:54 but to represent the market.

12:57 And if it's going to do that, then it

13:00 needs to make some sort of accommodation for IPOs,

13:05 even if historically their returns have been lagging.

13:09 I mean, somebody in the community posted a funny meme that said,

13:14 "If you're going to buy the hay stack,

13:16 you need to buy all of the hay." And that's a reference,

13:20 of course, to Bogle's uh comment that instead

13:23 of looking for the needle in the hay stack,

13:25 just buy the hay stack.

13:26 And I I I think I think it's important for us to, you know,

13:31 just be careful before we go down the rabbit hole that anytime you deviate

13:37 from the basic premise that an index

13:39 fund is designed to replicate the entire market,

13:42 you got to be really careful about

13:45 imposing rules that deviate from that fundamental philosophy.

13:51 And it's not to say that there can't be any rules.

13:54 All of the major indexes impose some rules for specific reasons,

13:59 whether it's float or uh length of time being listed publicly,

14:05 liquidity, all of those things.

14:06 And those are done for for reasons to protect investors,

14:10 but they're not done because they

14:13 think certain companies will outperform other companies,

14:15 which is just a forecast.

14:17 And so I think it's just really important to keep that in mind as we go forward.

14:22 Yeah.

14:23 And I would say those considerations are done

14:25 to make the indexes replicable by index funds,

14:28 but they're not done to make, you know,

14:30 to give it better returns or anything like that.

14:31 It's just like, okay, we want this index to be a representation of the market,

14:35 but we also want it to be investable.

14:37 Therefore, we're going to make sure stocks are liquid

14:39 and whatever other criteria they they choose to include in that specific index.

14:44 Yeah.

14:44 In the old days, I guess when indexes were nothing but benchmarks,

14:50 then those constraints were or those considerations were less important.

14:55 But now that indexes are not just benchmarks for other funds or other managers,

15:01 they're actually investment strategies as well,

15:04 then they do need to be investable for all of those reasons.

15:07 So those those rules are there for good reasons, but as you said,

15:11 Ben, they're not there because the index

15:13 providers think that they will enhance returns.

15:17 Yeah.

15:18 Uh okay.

15:19 So we we we kind of left off there with IPOs have low expected returns.

15:23 Companies go public when they think their stock price is

15:25 high and they can get a good valuation for their business.

15:27 Which means if you're investing in IPOs on the secondary market,

15:30 you might expect low returns from those investments.

15:32 and index funds just by nature of the reason

15:35 that they exist do invest in they they tend to invest

15:38 in in IPOs on the secondary market although when we talked

15:43 to uh Jim Rolley from Vanguard they they mentioned that they do

15:46 try to get IPO allocations when possible but even then they're

15:50 going to be like Vanguard's not going to get a big

15:52 enough IPO allocation to fill what they need in general

15:55 for a newly listed company just because their funds are so big.

16:00 So anyway, I think in general we can say index

16:02 funds are buying these these shares on the secondary market,

16:04 which doesn't tend to look so good.

16:06 And again, we'll come back to those data in a minute.

16:09 So if you're an index fund investor, I mean,

16:12 you probably don't love the idea of buying overpriced stocks,

16:14 but index funds do it because they're representing the market.

16:17 They they they gobble up whatever gets

16:19 included in the index regardless of its price.

16:22 Uh now, the IPO inclusion rules do vary across indices.

16:26 This is important.

16:27 Uh, as of right now, as of the time of recording,

16:30 the S&P 500 does require a stock to have been

16:33 trading on a public exchange for 12 months before inclusion.

16:37 So, as of right now,

16:38 and and this is one of the things there have been some rumblings about changing,

16:41 although these are these are like unsubstantiated,

16:44 you know, uh, anonymous source type information,

16:48 but apparently S&P is considering changing their inclusion

16:50 rules for some of these big IPOs.

16:53 As of right now, factually,

16:54 they do require 12 months of trading before inclusion.

16:58 So that's S&P 500, which is a subset of the S&P 1500 composite.

17:03 Now, that S&P 1500 composite has a different

17:06 set of rules than the S&P total market index.

17:10 So the S&P total market index allows for inclusion

17:13 of IPOs within 5 days for stocks that meet certain criteria.

17:17 So pretty interesting.

17:18 two very different methodologies even within S&P indices.

17:23 Now that within five days that's sort

17:25 of near immediate inclusion that's called fast track entry.

17:29 So that's a concept that is pretty important to understand on this topic.

17:32 Basically stocks that meet certain criteria can be eligible

17:35 for near immediate inclusion in some total market indices.

17:40 Uh so the I mentioned S&P 500 has

17:42 historically required shares to trade for a year.

17:44 Yeah.

17:44 So, there's this article from Bloomberg saying

17:47 that S&P may be considering an S&P 500 rule change to accelerate the inclusion

17:51 of some of these big IPOs like SpaceX.

17:54 Um, NASDAQ, when I wrote these notes originally,

17:58 NASDAQ was considering, so I had my notes in past tense,

18:00 but they've since adopted similar changes for the NASDAQ 100

18:05 uh to accelerate inclusion of some of these big IPOs.

18:09 And we can talk more about the details of of those changes.

18:12 There's some interesting stuff there.

18:14 Um now so the the the implications for index fund investors

18:19 are pretty important and and this paper that I want to talk

18:22 about uh comes from Marco Sammon who we've had on this podcast

18:26 and talked to him about this paper on the podcast.

18:28 So his 2025 paper looks at how fast track entry into crisp.

18:33 So that's the center for research and security

18:34 prices indices affects stock returns and IPO deal structure.

18:39 This is fascinating stuff right?

18:41 It's like index funds have become so big that index inclusion affects

18:46 stock prices which that part's you know you can see that but it

18:48 actually affects the structure of IPO deals which is like it's just crazy

18:52 these these sort of second order effects of the growth of index funds

18:57 tail wagging the dog that the uh

19:00 right

18:59 right it's very like that that the index fund is created to uh mirror the market

19:04 or represent the market but the market is

19:08 evolving to squeeze itself into the index fund.

19:12 Yeah.

19:12 Which is which is crazy and that's fascinating.

19:15 A big part of this topic and why it's so interesting is is that it's like some

19:20 there's been some speculation that as I mentioned

19:22 S&P and we know NASDAQ did change their rules.

19:25 There are two ways you can interpret that.

19:27 One way is that it's you know nefarious that that NASDAQ in the case

19:30 of NASDAQ at least that they're changing

19:32 their index rules so that their index the funds

19:36 tracking their index like the NASDAQ 100

19:38 will buy SpaceX stock and that they're doing

19:41 that to curry favor with Musk to get uh SpaceX to list on their exchange.

19:47 So that's the sort of um bad intent view.

19:51 The good the noble intent view is that well these are

19:53 massive companies and again why do indexes exist to represent

19:58 the market of course you want to have a massive company

20:01 that is listed on the market included in your index as soon

20:03 as possible so that's the noble the noble intent for you

20:06 anyway so VTI which is uh the massive $2 trillion uh

20:13 index fund that I mentioned earlier it that's a Vanguard US

20:16 total market fund it tracks the crisp US total market index Now,

20:21 Crisp is another index that adds eligible securities to the index

20:24 within as few as 5 days for fasttrack entry.

20:27 So, Marco Salmon and his co-author in this paper

20:30 show that the expected index uh investor demand

20:33 for IPO shares causes fasttrack IPOs to outperform their non-fastrack

20:38 counterparts by over 5 percentage points following their listing.

20:42 So, they list they they pop as tends to happen.

20:45 So, their price increases relative to their listing price.

20:48 But the fasttrack inclusion stocks pop more.

20:52 They outperform by more.

20:54 Now this is the interesting part.

20:56 The outperformance peaks at the index inclusion

20:58 date and then reverts significantly within 2 weeks.

21:01 So what's happening there?

21:02 Basically index funds are being frontr run by intermediaries like hedge funds

21:06 who know that index funds are going to be buying the shares once

21:09 they become eligible for inclusion and then the index funds end up

21:13 holding the shares as they revert back down closer to their IPO price.

21:17 So they're getting frontr run basically and the index fund investors

21:20 are paying what the authors of this paper call a shadow tax.

21:25 Uh it's like like ticket scalpers for concerts and sporting events.

21:28 Kind of kind of like the same same idea.

21:31 So the idea is that this is probably

21:34 not an enormous obstacle for moderatelysized IPOs, right?

21:40 like the that the size of them relative to the index fund.

21:45 The share that it takes in the index is likely to be

21:49 so small that it's not a huge issue for index fund investors.

21:56 But what's changing here is the size of the companies we're talking about now.

22:01 SpaceX is I don't know several orders of magnitude bigger than

22:08 any recent IPO.

22:10 And so what used to be kind of a theoretical well I

22:14 don't want to say theoretical but let's call it a relatively trivial observation

22:19 is no longer so trivial and could actually you know create some significant

22:25 issues at least in theory that's that's the concern right is that fair

22:29 yeah yeah that is fair so that I mean

22:30 the magnitude I mean there's another paper that I'll talk

22:33 about later which is another Marco salmon paper so

22:35 this frontrunning IPO paper doesn't put the number into basis points.

22:41 Maybe I could have tried to figure that out, but I I don't know.

22:43 They they don't talk about that.

22:44 Um they put a dollar figure on it.

22:46 But anyway, their other paper that we'll talk about later, uh not just for IPOs,

22:50 but for IPOs, uh buybacks, like all the different market composition changes.

22:54 That's where they estimate a 50 to 70 basis point

22:56 drag relative to an index that delays uh making those changes.

23:02 Mhm.

23:02 So, we call it 50 basis points and that's from all the, you know,

23:05 smaller mid-size companies that are making changes and whatever

23:08 corporate actions and secondary uh seasoned equity offerings,

23:11 all that kind of stuff.

23:13 But yes, to your point, Dan, these companies are so much larger relative

23:16 to the index that whatever effect we've seen historically,

23:19 these ones would amplify it sort of, but like not actually though because crisp,

23:24 just to use that as an example,

23:25 like if we look at SpaceX, there are two two things,

23:29 and I'm getting way ahead of my notes here,

23:31 but there are two things that are really important.

23:33 One is the float.

23:34 So float is like how much how what proportion

23:36 of the shares are available to trade on the public market,

23:39 freely available to trade.

23:41 crisp weights by the by the free float.

23:44 SpaceX apparently there was an article in the FT

23:47 saying that SpaceX was aiming for a 1.75 trillion valuation.

23:51 Although I saw today a headline

23:53 that they're aiming for $2 trillion valuation now,

23:55 which is like wild, but they're only going to float uh 5%.

24:00 So at 1.75 trillion, that's an $88 billion free float.

24:03 So Crisp weights them as an $88 billion market capitalization company.

24:08 But in the case of Crisp,

24:10 they would exclude them entirely because Crisp has a 10% float cut off.

24:14 So it's like we're talking about this and yeah, these are big companies,

24:16 but if you actually kind of go, how does Crisp actually include stocks?

24:20 I don't think it's relevant at all unless we assume

24:24 that they're going to go public with a higher float.

24:26 Yeah.

24:26 And I think that's a really important uh point to stress.

24:30 And you you touched on it earlier, Ben,

24:31 when you said sort of it seems like people are

24:33 always kind of looking for the fatal flaw in traditional indexing.

24:38 And I I would say these are structural inefficiencies.

24:42 They're not ideal.

24:44 If we could snap our fingers and make them go away and smooth them over,

24:47 then sure, we would do so.

24:49 But we can't do that without all kinds of other knock-on effects that are

24:53 likely to be more detrimental than any improvement we might get by, you know,

24:59 changing this specific rule.

25:01 So, we always have to be very careful

25:02 that just because we're talking about this as an issue, as a genuine concern,

25:10 we're not saying abandon your strategy if you're a committed

25:13 indexer because now all of a sudden it's fatally flawed, right?

25:17 I think that's the wrong takeaway uh from any of this.

25:21 So yeah, agree 100%.

25:25 And I I you know, my title may have been too dramatic.

25:28 I hope I hope I didn't scare anybody off of index funds.

25:31 Uh but yeah, yeah, I agree completely, Dan.

25:34 Um it's maybe worth mentioning quickly that in this IPO p paper,

25:38 I didn't have this in my notes,

25:39 but Marco talks about the solution maybe being that companies

25:43 give index funds uh like a a predetermined significant IPO allocation.

25:50 Uh and that helps to let the company

25:53 that's raising capital keep more of the price increase.

25:56 So they might be able to raise more at a higher price

25:58 by sort of pre-agreeing with index funds how much they're going to buy.

26:02 uh because right now it's the intermediaries that are taking a big

26:04 chunk of that uh that price increase in the secondary market.

26:07 Anyway, it's just an interesting uh tangent about what

26:10 a potential solution to address that inefficiency could be.

26:14 Uh okay.

26:15 So, so that's IPOs and and index funds buying IPOs potentially

26:19 pushing up their price leading to lower expected returns all that stuff.

26:22 Another important index definition that I just mentioned it but that's proving

26:26 to be relevant to these mega IPOs is the concept of free float.

26:29 So free float is the proportion of a company shares that are

26:32 available for purchase in the public

26:34 equity market freely available for purchase.

26:37 U so like a company director that's

26:39 required to hold shares for example would not

26:41 be included in the free throw and there

26:42 a whole bunch of other criteria like that.

26:45 Uh most major indices as I just mentioned with Crisp have

26:49 a minimum float requirement and they weight stocks by their public float.

26:54 NASDAQ 100 is an exception to that and we can talk more about that in a minute.

26:58 Uh but a company could go public while only making a small portion

27:01 of their overall market capitalization freely available

27:03 on public exchanges which is often the case.

27:06 Companies will tend to have uh a like you know

27:09 20 to 30% or something like that as a public float.

27:13 Uh some of these companies I mentioned

27:15 the FT article it's speculated that these companies

27:19 are going to go public with low public floats like as low as 5%.

27:24 um which would be you know so as I mentioned before

27:27 at a$ 1.75 trillion valuation for SpaceX total market valuation uh

27:33 at a 5% float their weight in the eyes of indexes of indices

27:38 is 88 billion not 1.75 trillion and then I also mentioned there's

27:43 a big difference it's a it's a huge difference

27:46 and yeah and it fundamentally changes the issue too doesn't it

27:49 100% so when we're talking about oh these companies

27:51 are so much bigger this makes this issue magnif ified.

27:54 Well, yes, if they floated 100% of their equity, yeah, it's a huge difference.

27:58 If they float 5%, it's a non-issue.

28:00 If they float 10% and they're able to enter the index at all,

28:03 okay, now they're whatever.

28:04 They're still not a, you know, one of the biggest companies that's ever existed.

28:09 Uh, yeah.

28:10 Okay.

28:10 Yeah.

28:11 Yeah.

28:11 like at when investors are kind of thinking SpaceX

28:14 is going to have a big impact to the index,

28:17 it it may be you're fearing what the headlines

28:20 are saying without actually understanding the actual implication.

28:23 This is so yes, but and there is a but uh so NASDAQ

28:29 did change its rules and I talk about that in a second.

28:31 Um a lot of the headlines are about the index

28:33 providers considering changing the rules to accommodate these big IPOs.

28:37 But you're right, Ben.

28:38 As of right now, this is actually not that much of an issue.

28:42 Um, unless you're investing in the NASDAQ 100,

28:44 which you probably shouldn't be doing anyway,

28:46 that's a whole other topic for another day.

28:48 Um, so NASDAQ, when I originally wrote these these notes down,

28:53 they did have a 10% minimum float.

28:55 Uh, and they waited stocks based on the value of all

28:58 listed shares of the company with no regard for free float.

29:01 So, that's pretty interesting.

29:03 Uh but they had this whole index

29:05 consultation process which some other index providers are

29:07 also doing publicly like Footsie is

29:09 in the process of a public consultation right now.

29:11 They're they're um requesting people to write

29:14 in about potentially making changes to their indexes.

29:17 S&P as I mentioned is apparently considering doing this but they

29:22 haven't made a done a public consultation as far as I know.

29:26 Uh so NASDAQ though was an outlier.

29:28 So they did have a minimum float which was

29:30 not an outlier but they valued for for waiting

29:33 companies in their index they they used

29:34 the the total capitalization with no regard for free float.

29:39 Now in their consultation one of the things they changed or well a few

29:42 of the things they changed they did eliminate the free the the minimum float.

29:47 So now you could have a 1% float and technically

29:50 be included in a in the NASDAQ 100 index.

29:54 And then they introduced a float factor in their waiting of lowflat stocks.

29:59 So I I want to talk a little bit more about that because Dan,

30:01 you and I were chatting about this before we started reporting.

30:06 A lot of the a lot of the speculation

30:09 about NASDAQ making these changes with it was

30:11 that they were trying to change things to increase

30:14 the weight of lowflat companies in their index.

30:18 But NASDAQ actually calls this out specifically in their uh

30:22 sort of concluding remarks summarizing their consultation process.

30:26 So they say some respondents in their analysis of the impact appeared to assume

30:30 that the index that the NASDAQ 100 index is currently free float weighted.

30:35 However, this does not reflect the current methodology.

30:38 As noted in the consultation,

30:39 index constituents are currently represented at the full market capitalization

30:43 of eligible listed shares without regard to free float considerations.

30:47 Accordingly, the proposed lowflat security weight adjustment not

30:51 to exceed the full listed market capitalization would represent

30:53 a more conservative waiting approach than the one

30:56 currently in place rather than a more aggressive one.

30:59 So they've limited the low the 10% cutoff for minimum float.

31:04 So it'll take any level of float.

31:06 uh but they have adjusted uh the the way that they

31:09 weight securities to be more conservative for lowflat stocks not

31:13 more aggressive which is different from a lot of uh I

31:16 think the perception while they were in their consultation process anyway

31:21 so it goes some way to reducing this enormous concentration right

31:26 right right so we'll we'll take your lowflat securities but we're going

31:30 to weight them u more conservatively than we would weight a typical security.

31:37 Mhm.

31:37 Yeah.

31:38 Uh anyway, but they did change the rules and they did change them

31:41 in a way that would allow companies like SpaceX to be included in the index,

31:45 which would not have previously been possible.

31:48 They also sped up the inclusion so that uh they shortened the timeline

31:52 for how quickly a company an eligible company can be included in the index.

31:57 I mentioned earlier that the sort of cynical

31:59 view here is that NASDAQ is changing

32:02 the NASDAQ 100 index rules to win SpaceX over in an effort to get their listing.

32:07 And there was a bunch of articles on that speculating this.

32:10 And it's, you know, it's plausible.

32:12 Fine.

32:13 Uh, and again, that's because including a stock like

32:17 SpaceX in the index would force significant index fund buying,

32:20 which likely ends up being good for SpaceX, good for SpaceX's early investors,

32:26 good for NASDAQ if they get the listing,

32:28 but potentially comes at the expense of NASDAQ 100 index fund investors if

32:32 they end up buying a high-priced stock

32:34 that ends up having poor returns afterwards.

32:38 Now, again, it's a conflict of interest, right?

32:40 That that probably should be considered.

32:42 I agree.

32:43 I agree.

32:44 It's a conflict.

32:44 Yeah.

32:46 Uh now we've already talked about this at some length,

32:48 but the crisp US total market index for example uh tracked by VTI does

32:55 as of now continue to have a low float cutoff of 10% for fasttrack entry.

33:00 So it's just like if you're invested in VTI,

33:02 this is a non-issue at the current moment in time.

33:07 Uh okay.

33:08 So between inclusion criteria and index

33:11 waiting methodologies there's quite a bit

33:13 of uncertainty about how these mega IPOs will initially show up in indices.

33:17 Over time what tends to happen is the free float

33:19 tends to increase and whatever whatever and the seasoning happens.

33:22 So like you know in in three years all of these companies probably

33:25 are included in the index but the big concern about buying highriced IPOs

33:29 in a secondary market and then having them tank um it's it's not

33:33 clear how problematic that's going to be for a lot of index funds.

33:37 Um but over a longer period of time as I

33:41 just mentioned there these listings will change the public market.

33:45 Uh and that's again to reiterate that's why index providers are considering

33:49 making these changes to get these companies represented in their indices sooner.

33:54 Indices are meant to represent the stock market.

33:57 So if all of a sudden there's this massive new company listed

33:59 on the stock market like yeah the indexes probably should hold it.

34:03 They're not designed to be investments.

34:05 They're designed to represent the market.

34:08 Uh, okay.

34:08 So, just putting that in context, this is pretty interesting.

34:10 So, there's a blog post from S&P where they show that SpaceX,

34:16 OpenAI, and Anthropic,

34:17 those three of those big private companies at the time of writing the post,

34:21 which is fairly recent, uh, those companies would make up 2.9% of the S&P

34:27 World Index at their full market cap.

34:29 So, if we that's like full free float or or just whatever their full market cap.

34:34 So that's almost as much as Canada.

34:36 Three companies, three newly listed companies, which is pretty crazy.

34:41 Now, as I just said, that that was their total market cap.

34:45 So no consideration for free float.

34:47 Uh now, since a lot of these companies are expected to have low public floats,

34:51 I think that has to be accounted

34:52 for in estimating their their impact on the overall market.

34:55 So there's another post uh from MSCI where

34:58 they calculate the potential changes to the MSCI all

35:01 country world investable market index in the event

35:03 of some of these big companies going public in 2026.

35:07 Now this was written back in February 2026 when

35:10 SpaceX they had a modest valuation of only 800 billion.

35:14 Now I mentioned it's expected to be two trillion but you

35:17 know I think the general points are still relevant kind of crazy

35:21 to whatever whatever that is two two and a bit x

35:23 their valuation in the course of a couple months you know

35:30 that was pre the xai acquisition so part

35:33 of that is just them acquiring xai and their valuation increasing

35:36 on that basis um but I think it's probably

35:39 like a 2x even over that combined valuation anyway Okay.

35:45 Uh, so this blog post from Msei asks,

35:47 "What would happen to the index to this Msei all country world imi index,

35:53 imi investment market index." So it's like pretty much all stocks that exist.

35:57 What would happen to the index if the 10 largest companies

36:00 from the MSCI all country venturebacked private company index went public?

36:05 Now they comment that since the free float

36:07 at the time of listing is unknown as of now, we'll we'll know when they list.

36:12 They go through a few different scenarios.

36:14 Um, at a 5% float, which again is what SpaceX

36:17 is expected to go public with, only four of the 10

36:21 large private companies that they that they're looking at, would

36:24 actually achieve index inclusion based on MSEI's inclusion rules.

36:28 So again, we come back to that case where

36:30 not all of these companies would be index eligible.

36:33 MSEI has different criteria than Crisp or S&P, but based on their rules,

36:38 four of the 10 companies would not be eligible.

36:40 Sorry, only four of the 10 would be eligible at a 5% float.

36:45 At a 10% float, seven of the 10 companies would achieve index inclusion,

36:50 but they'd be pretty small weights in the index.

36:51 And there's a chart that we can hopefully include in the video that shows the um

36:55 sort of the ranking of these companies in the in their in the market uh by size.

37:00 Um but what's interesting is that while the overall

37:03 market weights in percentage terms would not change

37:06 uh would not be huge sorry even

37:09 in a 25% float scenario MSEI finds that the dollar

37:13 flows just for funds tracking MSI Msei indices

37:16 would be huge with newly listed private companies

37:20 receiving billions of dollars in investment and the largest

37:23 existing public companies seeing billions in outflows.

37:26 So I think those flows are really what matter to index fund investors

37:30 because even a small percentage change you

37:32 know if it's billions of dollars changing

37:35 uh moving from one equity to another that's kind of what what matters

37:39 for uh the index funds who are being forced to buy and sell shares.

37:43 I think there are probably some interesting tax considerations here too.

37:45 I don't know enough about um how exactly that would play out

37:49 with US listed ETFs because they do have some mechanisms to to reduce tax,

37:54 but this would be a lot of a lot of buying and selling.

37:57 Anyway, that that'll be interesting to see how that plays out, too.

38:00 Um okay, so just to recap, index funds,

38:04 depending on the rules of the specific indices they track,

38:07 may or may not invest in these mega IPOs.

38:09 And even if they do,

38:10 it's likely going to be in a weight reflecting their public float.

38:13 Unless we're talking about the NASDAQ 100,

38:15 which as of recently would use its newly adopted float factor,

38:19 which again is more conservative than their previous

38:21 methodology of using the total market capitalization.

38:25 So that's kind of where we're at.

38:26 Um I think it Yep.

38:30 I was just going to comment on on your YouTube video.

38:32 I noticed many comments about why are there rules if we're

38:36 just going to go change them to include companies like this?

38:39 What's your take on that those questions?

38:42 And the market changes like it's not normal.

38:44 So take the S&P 500, right?

38:47 Normally a company that goes public,

38:49 it just it wouldn't even be a consideration that that company may

38:53 make it into the index because uh it wouldn't be big enough.

38:59 Like it's the the 500 leading companies in the US.

39:01 Well, a newly listed company is not going to fit that criteria.

39:07 Um, but now we're in a world where, okay, companies are staying private longer.

39:11 They're going public when they're much bigger.

39:14 And so, I mean, if I'm S&P, yeah, I'd be considering making changes, too.

39:19 You want to, if you want to represent

39:20 the 500 leading companies in the US market, well,

39:24 just because it hasn't been listed long enough,

39:27 I I don't know if it makes sense to exclude it.

39:31 Oh, yeah.

39:32 It's interesting.

39:33 Makes sense.

39:34 And it these are massive companies and very

39:38 rare situation when they're at IPO time.

39:43 I would expect like this is not a normal thing to see in the market.

39:50 There have been some other changes.

39:52 The one that comes to mind I can think of is

39:54 the uh S&P TSX capped index that is a non-issue today.

40:01 Um, but the rule is I still I think it's

40:05 probably still part of the index methodology in Canada that no

40:10 company can represent more than 10% of the index

40:13 and no company in Canada currently is very close to that.

40:18 But that goes back to the old Nortell days in the late 90s,

40:22 early 2000s when one company represented more than 30% of the index.

40:26 And they said, you know, like we get it,

40:29 the market or the index is supposed to represent the market,

40:32 but this is really a pretty egregious bit of poor

40:38 diversification with a single company representing the one-third of the country.

40:43 So, we're going to put in this rule because it just seems sensible.

40:46 Now, is it arbitrary?

40:48 Maybe.

40:49 Um, is it defensible?

40:51 I think so.

40:52 You know, I don't have too much of it.

40:54 It's basically a circuit breaker.

40:56 It's not really there to be to shape,

40:59 you know, uh, the index on an ongoing basis.

41:02 It's just there as a guard in case

41:05 something gets really inflated and presents an unusual uh,

41:12 concentration risk to index investors.

41:15 So, this seems like it's kind of motivated by the same thing.

41:18 It's like the rules almost always work,

41:21 but when some really strange situation comes about

41:25 and you've got an IPO valued at $2 trillion,

41:29 something that's never happened before,

41:32 that maybe it's worth at least questioning the original rules and tweaking them.

41:38 I I I think that makes sense.

41:40 I'm not saying that they're always going to make the right decisions,

41:43 but it it does seem reasonable to revisit them, right?

41:47 Yeah, that makes sense.

41:48 Don't don't just ignore something when a $2 trillion company is about to IPO.

41:56 Yeah, I would also note Yeah, it's for sure.

41:59 There's a couple things that that I want want to add here.

42:01 one is I'd be very interested, Dan,

42:04 to see the S&P TSX composite and capped composite side by side,

42:11 but free float adjusted because S&P didn't start

42:15 float adjusting their indexes until 2005, I believe.

42:21 And so I I could imagine that Nortell would have had a lot of closely shel

42:25 held shares and like they had a lot

42:27 of shares in their pension plan, for example.

42:28 I' I'd be interested.

42:29 Anyway, so I I wonder how much free float

42:32 adjustments um mitigate that concentration risk in in the index.

42:39 Uh in other words, it would not have represented such a large

42:42 share had they had that free float adjustment in place.

42:45 That's my my hunch.

42:47 Yeah.

42:47 I just know that it was because that was in late

42:50 90s that that index concentration got so serious in Canada

42:55 and I know that they changed to float adjusted weights in 2005.

43:01 Um yeah, which is just on the idea of of changing

43:08 uh index methodologies like that's a huge one.

43:11 S&P in 2004 they announced that in 2005

43:15 I believe that they would start free floating.

43:16 Prior to that they were not using free float weights.

43:20 Um so that alone is like you know I'm just

43:24 trying to I found an article about this from 2004.

43:28 Uh it's all focused on the the sense of the sense

43:34 of most index users is that float adjustment reduces the costs

43:37 of running index funds and ETFs because stocks with less

43:41 float and therefore less liquidity have lower weights in the index.

43:46 Index users also feel that basing the index

43:48 on available shares instead of total shares means

43:50 that the index is a better reflection

43:52 of the market and through the market of the economy.

43:55 I would agree with that.

43:57 Yeah.

43:57 Right.

43:57 I mean, uh, shares that are not available to the public

44:01 is not really what most of us mean by the market, right?

44:05 It the index is not supposed to represent the economy.

44:09 It's supposed to represent the stock market

44:13 and the stock market doesn't really include shares that don't trade, right?

44:18 So, I actually think that that that makes good sense.

44:22 That's actually super interesting.

44:23 I wish I'd looked at this earlier.

44:24 Um, in in an October 2003 concept paper prior

44:27 to announcing the decision to move to float adjustment,

44:30 S&P highlighted reasons against the switch,

44:33 we looked at the academic and theoretical basis for indexing,

44:36 but found no arguments for or against float adjustment, said Blitzer.

44:41 Side note, David Blitzer was an early guest on this podcast

44:45 when he was still with S&P before he retired.

44:48 It's an episode worth checking out if you want to hear more about

44:51 some of the inside baseball of how indexes are are created and managed.

44:55 Anyway, um this is more quote from David Blitzer.

44:59 Increased interest in investing outside the US seems

45:02 to have raised the awareness of float issues in foreign

45:04 markets where cross holdings and strategic holdings by governments

45:07 or founding families are are more common than the US.

45:10 That's also interesting.

45:12 Uh anyway, so just on the topic of yeah

45:16 indexes make changes to reflect changes in the market

45:19 and I think as this article also points out

45:21 changes and how indexes are being used by investors.

45:25 I think we heard about that with our um when we had when

45:29 I was in New York and and talked to Jim Rolley and Tim Edwards

45:32 uh they talked a little bit about this just about how index providers

45:36 and index fund providers work together to figure

45:39 out what the index should look like.

45:41 Um, and then I also wanted to mention

45:44 this episode is coming out the week after we had

45:47 Tim Edwards on the podcast who is the managing

45:50 director and global head of index investment strategy at S&P.

45:54 So, he also had a bunch of comments just on I asked him about that.

45:57 Why would an index provider change to accommodate these big companies?

46:00 And he had some interesting stuff to say.

46:05 Uh, okay.

46:06 That was a big tangent there.

46:08 Lots of fun though.

46:11 Uh, okay.

46:12 So, why does all this matter?

46:14 Why do we care about index inclusion of IPOs?

46:18 So, a big piece of understanding why we're

46:21 even talking about this is understanding that investing

46:25 in IPOs on a secondary market is one

46:27 of the worst investment strategies that you could possibly employ.

46:32 They tend to have a first day pop uh where the price

46:34 on the public market jumps up relative to the IPO price,

46:38 but most investors don't get the IPO price.

46:40 Getting an IPO allocation,

46:42 especially in hot IPOs like this, is really, really hard.

46:44 And even if you get one,

46:45 it's not going to be as big as you kind of hoped it would be.

46:48 And then investing in the shares once they're listed on the public market,

46:51 has been rough to say the least.

46:54 the sort of consistent pattern of IPO underperformance even as a name

46:59 named by Jay Ritter who's also been a guest on this podcast.

47:03 Uh they called it in a in a 1995 paper the new issues puzzle.

47:08 Uh so they had looked at companies issuing stock.

47:10 So this is IPOs but also seasoned equity offerings.

47:14 Uh companies issuing stock from 1970 to 1990 tended to be poor investments.

47:19 So in this paper they find that investment in IPOs receive average returns

47:24 of only 5% per year while similar listed firms return 12% over the same period.

47:32 Uh so the paper notes that to achieve the same

47:35 wealth 5 years later an investor would have had

47:38 to put 44% more money into new issues

47:41 in the in the sample than into established firms of the same size.

47:46 Pretty crazy.

47:47 And hope that they're right.

47:50 and and hope that they're right yet.

47:51 I guess that's I guess that's true.

47:54 Like you have to make that bet ahead of time

47:56 without knowing the historical data on the particular investment.

48:00 That is a good point.

48:01 Uh so that's data ending in in the '9s.

48:04 And then there's a more recent 2019

48:07 study from Dimensional Fund Advisors where they looked

48:09 at the first year secondary market performance

48:12 of more than 6,000 IPOs from 1991 to 2018.

48:17 So that actually does pick up right where

48:19 uh Jay Ritter's sample ends and they find

48:22 that a portfolio of IPOs generally underperformed the market

48:26 and a small cap index by about 2% per year.

48:29 Uh the main exception is the 1992 to 2000 period when the IPO portfolio

48:35 outperformed the small cap index by about 1.1% annually and that was mainly due

48:40 to IPOs consisting of small tech companies

48:43 that just their prices took off during

48:44 the com boom but we we kind of we all know what happened after that.

48:48 So it looks good for a bit but not so good afterwards.

48:52 Um if you sold in 2000 you did great.

48:55 Correct.

48:55 Exactly.

48:56 Yeah.

48:56 If you timed the bubble perfectly.

48:58 Yeah.

48:59 Uh so that this dimensional study finds that the poor returns are largely

49:03 explained by the factors in the FA and French five factor asset pricing model.

49:08 The IPO portfolio behaves like a portfolio of small growth,

49:12 low profitability, high investment stocks,

49:16 also known as junk in AQR's language or small

49:20 crap growth as I've heard it called by some people.

49:23 And these are just these are types of stocks

49:25 that they're more volatile and they tend to lag behind

49:27 the broader market because kind of stocks that if

49:30 you can choose to avoid them you might want to.

49:33 Uh and a really interesting thing is that so

49:36 this is dimensionals paper ends in 2018 but their finding

49:39 is pretty easy to update and replicate because

49:43 there are actually two ETFs that invest in IPOs.

49:47 They invest in IPOs when they list and they

49:49 hold them for three years and then sell them.

49:52 So that there's the Renaissance IPO ETF

49:55 which exclusively invests in large US IPOs

49:58 and as I said they hold them for three years and then sell them.

50:01 It has underperformed VTI which just tracks the the total US market

50:05 by more than six percentage points annualized since inception in October 2013.

50:11 And as expected, if you run a quick regression,

50:14 which I did in portfolio visualizer,

50:16 uh it behaves like a portfolio of small stocks with high prices,

50:19 low profitability, and aggressive asset growth.

50:23 And then there's another one that has uh international stocks.

50:27 Uh this one has been listed since 2014.

50:29 Its ticker is IPOS, which I think

50:32 is quite a comical or unfortunate ticker choice.

50:35 Um so uh yeah it it's also underperformed

50:40 by by a wide margin relative to just a just an index.

50:45 Uh you can also see similar underperformance if you look at J Ritter's

50:48 data uh in his data from 1980 to 2023 shows similar similar underperformance.

50:55 Uh so that's just like the broad picture of IPO data.

50:58 There are different ways you can slice it and I'll talk

51:00 about that uh from a couple different perspectives in a minute.

51:04 Uh, but first I want to talk about lowflat IPOs.

51:06 But before I do that, do you guys have any comments?

51:09 It seems to me your strategy, Ben, is buy the index, short the IPO ETF.

51:15 That's not investment advice.

51:16 It's just an observation.

51:18 Not bad.

51:19 Maybe Mark McGrath can do that in his son's uh whatever that is, RSP.

51:23 Triple leveraged in his ESP.

51:25 I'll I'll send him a message.

51:26 You got a new new idea.

51:29 Yeah, new strategy for him.

51:31 Uh yeah, I mean more realistically what

51:36 and I'll talk about dimensional in a second.

51:38 Dimensional just excludes those types of stocks.

51:40 Uh and it it's even more nuanced than

51:42 that because not all IPOs are necessarily bad.

51:45 Anyway, let me let me keep going in the flow that I have this written down.

51:50 Okay, so those are IPOs.

51:51 They kind of suck as investments in the secondary market.

51:53 They're great if you're a holder of the private

51:56 company shares and you can uh well, they're great initially.

51:59 Um, the problem for employees of companies is they tend to have lock up periods.

52:03 If you have to wait whatever a long period of time,

52:06 you don't usually get to participate in that pop.

52:08 Um, but if you held the shares and for whatever reason don't have a lockup,

52:11 the IPO is kind of great.

52:12 But if you're buying in the secondary market, then not not as great.

52:17 Uh, okay.

52:19 Lowflat IPOs.

52:20 So, we talked earlier about what float means.

52:23 SpaceX is probably going to go public with a low public

52:26 float and some of the other companies may also do something similar.

52:30 If we look at lowflat IPOs in particular, uh the data look particularly bad.

52:36 So just to make to re reiterate from earlier, a low float IPO means that only

52:40 a small portion of the company's shares are available

52:42 for public trading and that can amplify price swings

52:45 because demand is concentrated on a relatively limited supply.

52:49 Uh, and again, that's kind of what we're expecting

52:51 to see from some of these big private companies.

52:54 Um, now there's another way to slice the data here that's important.

52:57 Lowflat IPOs for high revenue companies because SpaceX

53:01 and OpenAI are they are generating large revenues.

53:05 So, lowflat high revenue or high sales is pretty rare but not unheard of.

53:10 So, I did I have been emailing with Professor J.

53:13 Rutder about this um for for a bit now.

53:16 uh he did send me a table that we can show in the video uh

53:20 that I saw Bloomberg reported on these data

53:22 but I hadn't seen the table anywhere.

53:24 So I'm pretty sure that our viewers here are getting

53:26 a pretty exclusive look at some at some neat data.

53:29 So Professor Ritter found 11 lowflat so again below 5% public float IPOs

53:35 for companies with inflationadjusted trailing 12

53:38 month sales of 100 million or more.

53:41 10 of the 11 IPOs underperformed the market

53:43 within three years with average underperformance of roughly

53:47 50% relative to the market from the offer

53:50 price and 60% from the first day close.

53:54 So we see there that there actually was a pop because

53:56 if you bought at the first day close you you did worse.

53:59 Um but that does suggest that you know well it's not not great.

54:02 Doesn't look good.

54:03 It looks worse than the average IPO.

54:07 Uh now when I was emailing professor Ritter

54:09 he also mentioned that these examples yes they had

54:12 low floats they also tended to have high price

54:14 to sales ratios at the time of the IPO.

54:17 Now again that's relevant for these current potential mega IPOs.

54:21 If SpaceX were to achieve its$ 1.75 trillion valuation,

54:25 let alone its $2 trillion valuation that I've seen more recently.

54:29 It would have a price to sales ratio

54:31 of more than 100 times based on trailing sales.

54:35 Wild.

54:36 Now, why does that matter?

54:37 Professor Ritter also show,

54:38 and this is one of the things that's not in my video on this.

54:41 Professor Ritter also showed me the data for all IPOs.

54:44 So, not just lowflat IPOs anymore,

54:46 all IPOs sorted on their price to sales ratio measured from the first close.

54:51 The market adjusted three-year buy and hold

54:54 return decreases uh with an increasing

54:56 price to sales ratio for IPOs of companies with sales over 100 million.

55:02 I mean, no surprise, I guess.

55:04 valuations matter even for IPOs.

55:07 Now, what what does that what does 100 times uh

55:10 what is the price of sales of 100 times mean?

55:13 Um just for context, the highest price to sales ratio

55:16 for a a public S&P 500 constituent is Palanteer,

55:20 which at the time that I wrote these notes

55:22 had 73 time ratio uh price to sales of 73.

55:27 Uh the index as a whole, the S&P 500 trades at a price to sales of 3.1 times.

55:33 Now, in general, as listeners know,

55:35 high valuations are associated with low expected returns.

55:38 And these these current private companies seem to have very

55:41 high valuations or are expecting very high valuations when they list.

55:47 Okay, so for for index fund investors, the problem is pretty complicated.

55:52 Um, large private companies go public with high valuations.

55:54 They're going to change the landscape of the broader market.

55:56 Now in response as we've talked about indices have

56:00 to rebalance to remain reflective of the of the broader market.

56:03 That's their that's why they exist.

56:05 Market cap weighted indices will rebalance in response

56:08 to stock market composition changes which includes a whole

56:10 bunch of things including buybacks and seasoned equity

56:13 offerings as I mentioned earlier but also IPOs.

56:17 uh in in making those changes, indexes and index funds,

56:22 they're implicitly engaging in a form of market timing.

56:25 And that language comes from Marco Sammon's paper on this topic.

56:28 Tends to be really bad market timing, though.

56:30 Um and again, as we talked about earlier, the issuers,

56:33 the companies that are listing on the public market,

56:35 they'll generally want to issue stock when their valuation is high,

56:39 when their own company's valuation is high,

56:41 and buy back stock when their company's valuation is low.

56:45 index funds well in indexes and index

56:48 funds because their goal is to track indices

56:52 that reflect the market end up sort of systematically

56:55 buying high and selling low at the margins.

56:57 I want to reiterate this isn't like you know

56:59 this is not a death blow for index funds.

57:01 It's just it's it is a thing.

57:03 Um but I'll I'll put a number to it in a second.

57:06 So in Marco Sammon's 2025 paper which is now published

57:09 in the journal of financial economics which is pretty cool.

57:11 we had him on before it was published to talk about it.

57:14 Uh index rebalancing and stock market composition

57:17 do indexes time the market is the paper.

57:19 It estimates that that sort of adverse selection is what

57:24 he called it in an earlier draft of the paper.

57:25 But that that market timing ends up creating a performance

57:28 drag of between 47 and 70 basis points per

57:30 year relative to a delayed rebalancing approach that waits like

57:34 12 months for example to reflect changes in market composition.

57:38 So there is like a lasting negative effect on index

57:41 fund returns that could be avoided if index funds delayed rebalancing.

57:46 If if they prioritized expected returns rather than tracking error to an index.

57:50 If an index did this um they'd have massive tracking error to the index.

57:55 I mean they wouldn't be an index fund basically

57:57 at that point and that tracking error would be would be sad.

58:01 Uh now as listeners know I'm a huge fan of index funds.

58:05 Uh but as listeners also know we we don't use

58:07 them at uh uh the assets that I oversee at PWL.

58:11 We we use dimensional funds rather than index funds.

58:13 I personally don't invest in market cap weighted index funds.

58:16 And this is I mean there are a bunch

58:17 of reasons for that but this is one of them.

58:21 Uh dimensional waits 6 to 12 months after

58:25 a company lists before considering including it in their portfolios.

58:29 Uh, Dimensional also intentionally tilts away from what I called

58:33 the junk earlier that IPOs tend to behave like more more generally.

58:38 Uh, and I just want to say real quick that PWL uses Dimensional Funds,

58:43 but they are not paying us uh to say

58:46 this and I I gain nothing from people using Dimensionals products.

58:49 They they have ETFs uh in the US and their competitor Avantis,

58:54 which I'll talk about in a second, has products in Canada.

58:56 So I mean this is not intended to be like a sales pitch.

58:58 It's just there's a company doing this uh doing this a different way.

59:03 So that's dimensional.

59:04 They wait six to 12 months to include IPOs.

59:07 Uh they also I mean there it's more

59:09 complicated than that because they also tilt toward

59:11 smaller and lower priced companies which have

59:13 in many cases and particularly in the US underperformed.

59:16 So even if we can say well hey

59:18 Dimensional didn't pay the IPO you know inefficiency cost.

59:22 Well, in the US market at least,

59:24 they did underperform because they tilted away from the large

59:26 stocks that did really well over the last 20 years.

59:29 Anyway, it's complicated.

59:33 Uh, yeah, and as the uh tireless defender of traditional index funds,

59:37 I I think it's again worth pointing out is that no one's

59:40 arguing that any of these strategies is free of those structural inefficiencies.

59:46 And very often you're just exchanging one

59:49 set for another when you change investment strategies

59:54 based on relatively small things like how you wait an index, right?

59:59 Like these are fairly subtle changes.

1:00:01 Sometimes they eliminate some problems and just introduce others.

1:00:05 So you know there's a play on words there.

1:00:08 How you wait and how you wait.

1:00:11 That's right.

1:00:14 the waiting is the hardest part as they say.

1:00:17 So, uh yeah.

1:00:19 Uh yeah, but I I agree, Dan, and and I do want to reiterate that this is

1:00:23 this is not intended to say index funds are are bad.

1:00:26 It's just like this is I have somewhere in my notes

1:00:29 that like this is this is just part of the indexing lifestyle.

1:00:33 Like it's it's it's a cost.

1:00:34 People are worried about this right now because of these big IPO potential IPOs.

1:00:38 But this is a cost that index funds have

1:00:41 been paying like for I don't know for how

1:00:44 long for however long I think Marco's data

1:00:46 in that paper goes back to 1980 if I remember correctly.

1:00:50 So it's it's it's there it exists

1:00:53 but index funds have still outperformed pretty much everything.

1:00:57 So how how bad is it really?

1:01:02 Yeah.

1:01:01 Yeah.

1:01:02 Uh so I in my video on this uh I mentioned dimensional as doing things in a way

1:01:08 that intentionally avoids the costs that we're talking about

1:01:10 with IPOs which introduces other trade-offs as you just mentioned Dan.

1:01:14 Um but I got I got a ton of questions

1:01:17 about Avantis because I did not mention them in the video.

1:01:20 Frankly, I did not know how they dealt with IPOs when

1:01:22 I recorded the video and I didn't have time to reach out.

1:01:26 But I got that question so many times that I reached out to them and just asked.

1:01:30 I I had assumed that it was pretty similar to what Dimensional does.

1:01:34 Dimensional again, they wait 6 to 12 months and then

1:01:35 they incorporate the the newly listed security after that.

1:01:39 Avantis, to my surprise, has no problem including newly listed companies

1:01:44 and portfolios if they have enough information

1:01:46 on their full set of financials uh and they

1:01:49 trade at attractive prices relative to those financials.

1:01:53 And they also mentioned that while the aggregate

1:01:55 IPO data that we just talked about is terrible,

1:01:58 if you sort IPOs on profitability, the more profitable ones aren't so bad.

1:02:03 So if you're investing in, you know,

1:02:05 really uh uh negative earnings stocks at IPO, yeah, you you did poorly.

1:02:11 But if you sort by profitability, the more profitable stocks,

1:02:14 and that that shows up in in Professor Ritter's data, too.

1:02:17 So that was that was interesting.

1:02:19 That surprised me.

1:02:20 So they they are really just looking at expected

1:02:22 returns more so than uh a blanket exclusion of IPOs.

1:02:27 And then they also noted uh when we were chatting about

1:02:30 this that they are totally aware of the in issues surrounding

1:02:33 index inclusion post IPO and so they try not to be

1:02:36 on the same side of indices when they're buying uh and selling.

1:02:40 They try to be on the opposite

1:02:41 side or stay neutral during the rebalancing period.

1:02:44 That was interesting.

1:02:45 So they they have their own way of dealing with IPOs,

1:02:47 but they're not doing a blanket exclusion

1:02:49 or waiting period in the way that Dimensional does.

1:02:53 So in summary, there's like three different strategies

1:02:57 that that each come with their own trade-offs,

1:02:59 and no one way is necessarily more right or more wrong than the other.

1:03:03 It's just a trade-off that investors have to accept.

1:03:08 Yep.

1:03:08 And they'll all introduce their own tracking error,

1:03:11 whatever you want to call it.

1:03:11 they'll they'll they'll introduce performance

1:03:13 differences relative to each other.

1:03:15 Like if we held all else equal but just had, you know,

1:03:18 one one fund that's going to invest in IPOs within five days,

1:03:22 one fund that's going to wait six to 12 months,

1:03:24 and one fund that is going to do what Avantis does

1:03:28 and all else equal and just let the IPOs be different.

1:03:31 There'd be, you know, pretty meaningful tracking error more than more

1:03:35 than any fee differences across the funds,

1:03:38 which comes back to the the question for the investor

1:03:40 like which knowing that you're going to introduce tracking error.

1:03:43 Marco talks about this in his paper too.

1:03:45 knowing that you're going to introduce tracking error from doing something,

1:03:48 you have to have a lot of conviction that the expected long-term outcome knowing

1:03:53 that you can live with tracking error

1:03:54 that the expected long-term outcome is good.

1:03:58 Okay,

1:03:58 which is an interesting question because in the short term there's going to be

1:04:00 a lot of noise excluding IPOs might look really bad over some periods.

1:04:05 I mean even in the uh we'll show the chart for that IPO ETF there there there

1:04:09 was a period uh where it was outperforming

1:04:12 and so if you're excluding IPOs during that period you're

1:04:14 going to look at your decision and be like man I was wrong but I think you

1:04:17 have to think about what is the long-term expected

1:04:19 outcome of this thing and then acknowledge that because

1:04:21 we're dealing with a ton of uncertainty in financial

1:04:23 markets in the short term there's going to be a lot of noise and you have to be

1:04:27 able to stick through whatever you have decided

1:04:29 to do through the noise and I think

1:04:30 that applies to somebody choosing to use dimensional funds it

1:04:33 applies to somebody using index funds It applies right

1:04:36 now where people are worried about all these IPOs.

1:04:38 But like man, if if you've been investing in index funds,

1:04:40 this is you've been exposed to this exact thing.

1:04:43 And now just because it's a big headline is

1:04:45 not a reason to uh to bail on the strategy.

1:04:48 Yeah, this comes up all the time.

1:04:50 Like investor discipline is key.

1:04:52 Like there's so much noise that comes up.

1:04:54 Right now we're talking about these mega IPOs,

1:04:57 but tomorrow be something different.

1:04:59 Next week, next month will be something different than that.

1:05:02 But if you're constantly looking for the edge

1:05:04 or the the downside to protect against,

1:05:08 you're probably going to end up worse off

1:05:10 if you keep changing and adjusting your strategy.

1:05:13 It's better just remain disciplined to a tried and true

1:05:17 to strategy that you're committed to for the long term.

1:05:22 Agreed.

1:05:23 Okay.

1:05:23 The last little segment I have here is index funds and private markets.

1:05:28 So with index funds with with with companies staying

1:05:30 private longer and going public when they are larger,

1:05:33 I think it's a natural question to ask whether investors should

1:05:36 be seeking exposure to private company shares before the companies go public.

1:05:41 I think there are a couple things to think about here.

1:05:43 There's a huge amount of survivorship bias in private company outcomes.

1:05:46 For every SpaceX or Open I open AI which are dominating headlines today,

1:05:50 there are thousands of companies that did not grow or failed entirely.

1:05:55 That skewess exists in public markets too,

1:05:57 but it's way more brutal in private markets.

1:06:00 It's really easy to look back right right now and say,

1:06:02 "Oh, I should have bought SpaceX shares." Even you probably couldn't have,

1:06:06 but you know, I wish I wish I found a way to get SpaceX.

1:06:11 But there are a ton of companies that um

1:06:13 private companies that that failed over the same

1:06:15 period over the time that SpaceX has been

1:06:18 operating and grown to its its current size.

1:06:22 uh including other space companies like it's

1:06:24 you know it's tough it's tough out there.

1:06:26 Uh and then another big thing is that the fees and costs associated

1:06:31 and we talked about this in a lot of detail in a previous episode.

1:06:33 The fees and costs associated with private company investments

1:06:36 can often absorb the financial benefits of owning private assets.

1:06:40 And as we've talked about,

1:06:42 that has largely been true with private equity funds in general,

1:06:45 which have delivered net of fee returns roughly in line with public markets,

1:06:50 especially when they're properly um matched to comparable public equities.

1:06:56 There are some really interesting stories floating

1:06:58 around right now about the length that length

1:07:01 that some people have gone to to uh to buy what they hope are SpaceX shares.

1:07:07 And that hope thing is a that's an interesting thing.

1:07:08 I'll detail in a second.

1:07:10 Uh there's one.

1:07:11 So there are these things called special purpose vehicles that get created

1:07:14 in order to pull investor money together and buy private company shares.

1:07:18 Private companies don't want, you know,

1:07:20 hundreds of investors on their cap table.

1:07:23 Uh and so a special purpose vehicle can pull a bunch of money together.

1:07:26 So there's just one entity that's buying shares.

1:07:29 So, there's one special purpose vehicle reported

1:07:32 on by the Wall Street Journal that had a 4%

1:07:35 upfront fee with an additional fee of 25%

1:07:39 of future profits when the shares are sold.

1:07:42 So, it's like, okay, you can get exposure to the shares through this SPV,

1:07:46 but you know, how much of the benefits are you actually going to keep?

1:07:52 Uh, and then there's another on the reporting on this.

1:07:55 One of the other uh uh things that comes up is

1:07:57 that there are questions about who actually owns what because the the structures

1:08:02 the the special purpose vehicle structures

1:08:04 and layers of ownership are so complicated

1:08:06 that that it's actually kind of hard to know what you actually own.

1:08:11 And then there are also stories of just outright fraud

1:08:13 in some of this reporting where people were, you know,

1:08:15 saying they could get access to some of these private

1:08:17 private company shares and they were actually just stealing the money.

1:08:23 um which hopefully is not too common, but it's it's out there.

1:08:25 Anytime there's something people really want,

1:08:27 I think it will uh create a a vector for fraud.

1:08:33 Um yeah, so I I mean I think people will see something like SpaceX,

1:08:38 they'll imagine all the money they can make if they were able to buy some SpaceX

1:08:42 shares or whatever company shares at a low

1:08:44 valuation and then sell when it goes public, which is true if you can do that.

1:08:48 Yes.

1:08:48 But unless you're an employee or otherwise

1:08:50 have direct access to the company's shares,

1:08:53 uh, early and direct access to the company shares,

1:08:56 financial intermediaries that do have access or able

1:08:59 to get access are not typically going to give you,

1:09:01 the end investor, access to an equity like that on terms that are

1:09:05 better for you than they are for the intermediary selling them to you.

1:09:10 Financial intermediaries, they don't have they don't tend to be in business uh,

1:09:14 to give you the investor money for free.

1:09:17 Uh there are some pretty interesting stories

1:09:20 about ETFs that have gotten exposure to SpaceX.

1:09:23 There are some like Fidelity uh who else was there.

1:09:26 There there are a couple of fund companies,

1:09:27 active managers who who did legitimately participate in fundraising

1:09:31 and were able to invest in some of these companies early,

1:09:34 which is pretty cool um and kind of interesting.

1:09:37 It'll be interesting to see how that affects the returns

1:09:39 of those funds because obviously this isn't their only holding.

1:09:43 We'll keep an eye on that.

1:09:44 Um, but there are some ETFs that tried to get

1:09:47 exposure through special purpose vehicles like late later on.

1:09:50 Um, so there's one ETF uh that attracted quite a bit of reporting and attention,

1:09:56 the ERS shares private public crossover ETF.

1:09:59 So it bought into SpaceX through an SPV in December 2024.

1:10:05 Now SPVS are not liquid uh not very liquid at least.

1:10:09 So this ETF, it's XOVR, I think is the ticker.

1:10:13 It's had to deal with some pretty

1:10:14 unique practical issues because it's a liquid vehicle.

1:10:18 It's an ETF holding a large stake in an illlquid asset.

1:10:21 So Jeff Tac from Morning Star has done a bunch of interesting writing on this.

1:10:26 What's even more interesting though, at least to me,

1:10:29 is that despite SpaceX reportedly rising in value substantially

1:10:34 since this ETF invested in it in December 2024,

1:10:37 the fund has actually lost money in absolute terms and even

1:10:40 more so relative to the market since it made that investment.

1:10:44 There's a whole bunch of reasons for this and Jeff

1:10:46 Tac goes through a bunch of the reasons in an article.

1:10:49 A lot of it is just that the other securities,

1:10:51 the public securities that are in the ETF have performed quite poorly.

1:10:56 Um but but Jeff Tac in one of the one of his articles on this and he's the he's

1:11:00 the managing director from Morning Star Research Services,

1:11:03 if people don't know who he is,

1:11:04 he wisely notes in one of his posts on this that when it comes to investing,

1:11:09 the more you covet something,

1:11:11 the more you should probably question your desire to own it in the first place.

1:11:15 I think a lot of investors are so eager to get a piece of SpaceX

1:11:19 and some of these other companies that in in this case of this ETF,

1:11:22 XOVR, they they got burned.

1:11:24 they they ended up losing.

1:11:25 Um some good news and this is also quite

1:11:28 interesting is that while it's generally difficult to get access

1:11:32 to private the private company shares that you want a lot

1:11:35 of public companies will make strategic investments into private companies.

1:11:41 Um and so I I think from that perspective public

1:11:44 market investors are not entirely locked out of private markets.

1:11:48 Uh Google invested in SpaceX in 2015.

1:11:51 More recently, Echoar received SpaceX stock

1:11:54 as part of a deal for wireless spectrum.

1:11:57 Amazon, Microsoft, and Nvidia are major investors in Open AI.

1:12:00 There there was a leak of OpenAI's cap table.

1:12:03 Microsoft owns a huge portion of their equity.

1:12:05 So, it's like I don't know, man.

1:12:07 You know, the hottest private companies uh well, in many cases,

1:12:14 public companies who saw potential in that now

1:12:17 hot private company have invested in them.

1:12:19 And so if you are a public market investor,

1:12:21 you are indirectly or not even indirectly like you're participating in some

1:12:26 of those private market successes before they trade on public markets.

1:12:31 I think Microsoft stock actually popped on uh can't yeah it

1:12:36 was an open AAI announcement um about their valuation I think.

1:12:41 So it's it's it's there like it's there's

1:12:43 you're not totally locked out of private market growth.

1:12:47 Um, okay.

1:12:50 Any comments before I finish up?

1:12:52 Yeah, this shows the the power of like sales and marketing.

1:12:55 Like when you hear about these different offerings,

1:12:58 like fund managers are actually just preying on the desires

1:13:04 and interests of investors and creating products that make it sound attractive,

1:13:09 but they're either high fees, hard to access,

1:13:13 or like this ETF you've you give an example

1:13:18 of are going to result in an undesirable outcome.

1:13:22 Um, obviously not guaranteed.

1:13:24 Some people get lucky,

1:13:25 but product manufacturers design things like this in a way to profit themselves.

1:13:32 Sometimes it benefits the investors,

1:13:34 but unless you pick the right one at the right time,

1:13:36 you're probably going to be worse off.

1:13:40 I think this is a really good reminder, too, that when you own the whole market,

1:13:46 you don't have to worry too much about FOMO, right?

1:13:50 Because and I I've made this argument with people before who say, you know,

1:13:54 they want to diversify more by buying crypto or AI plays or whatever it is.

1:14:04 Um even real estate.

1:14:06 These are things that are not necessarily directly represented in the index,

1:14:14 but they are indirectly just by well I said a minute ago or earlier

1:14:17 in the in the episode that the index

1:14:19 isn't really designed to represent the economy.

1:14:22 It's designed to represent the stock market

1:14:24 but the stock market is a proxy for the economy.

1:14:27 It doesn't always map it directly, but the idea is,

1:14:31 you know, to this point here, if you own the total market,

1:14:35 you already own a big chunk of Amazon, Microsoft, and Nvidia,

1:14:39 and therefore you also own a big chunk of Open AI.

1:14:43 So, you know, there's not a lot more you can

1:14:47 do other than own virtually every public company that's available.

1:14:51 And when you do that, you just, you know,

1:14:55 buy um trickle down sort of order or own a little bit of just about everything.

1:15:01 So, you know, as long as you're okay with that, yeah,

1:15:04 sure, you can overconentrate in one or the other stock or sector.

1:15:10 But if you just want a little bit of exposure to everything,

1:15:14 buying the total market index is still the best way to do that.

1:15:19 Yep.

1:15:20 Agree.

1:15:20 You think about it, it's like wi with Microsoft,

1:15:23 I can't remember how much it is, but Microsoft owns a huge portion of OpenAI.

1:15:27 So, it's like, does it make sense for you to go out

1:15:30 and try your best to find a way to buy more OpenAI?

1:15:34 Do you need to own more than what is represented by Microsoft?

1:15:37 I mean, I don't know.

1:15:39 I guess after the fact now, if you knew to do that a while ago,

1:15:42 we can say that, hey, that would have made a lot of sense.

1:15:44 But again, as I mentioned earlier, there's a ton of survivorship bias there.

1:15:48 Go back in time 10 years.

1:15:49 Which which private companies should we invest in?

1:15:52 I don't know, man.

1:15:53 Not so easy.

1:15:55 Yeah, it's hard enough to pick public companies.

1:15:57 It's harder Yeah.

1:15:58 to pick private ones with there's

1:16:00 less information available to make those decisions.

1:16:02 So, yeah.

1:16:03 Yeah.

1:16:04 All right.

1:16:04 So, my wrap-up here, uh, yes,

1:16:06 it is possible that these upcoming mega IPOs will affect market indices,

1:16:10 especially if these companies end up being fast-tracked for inclusion.

1:16:14 And then due to index fund mechanics,

1:16:16 index funds will buy up IPO shares at any price if they're

1:16:20 included in in the index they're

1:16:21 tracking leading to adverse selection and potentially

1:16:24 even making the problem worse for themselves because people know the indices are

1:16:28 going to or the index funds are going to be buying those shares.

1:16:31 If you're an index fund investor, I think this is a really important point.

1:16:34 This is a cost that you have been paying and still outperformed most everything.

1:16:40 Um maybe these cases as you mentioned earlier Dan are a bit more extreme

1:16:43 just because of the size of the companies but this is like this is it.

1:16:46 This is part of the indexing lifestyle.

1:16:48 You're deciding to accept what the public market has to offer

1:16:51 which includes uh investing in IPOs that sometimes have high prices.

1:16:58 So you can either accept that and carry

1:17:00 on which has been a very successful strategy

1:17:02 and I suspect it will continue to be

1:17:03 a very successful strategy in the future or you

1:17:07 can look at alternatives like dimensional funds

1:17:09 or Avantis funds that we talked about which have

1:17:11 their different methodologies for avoiding IPO flops

1:17:16 and those are also lowcost broadly diversified systematic funds.

1:17:20 They just have their their various ways

1:17:22 of not autoinvesting in IPOs at any price.

1:17:26 And then the last piece is no, you probably can't get access to these private

1:17:29 companies directly prior to the IPO.

1:17:32 You can try and get an IPO allocation.

1:17:34 Uh but when everyone wants to buy something,

1:17:37 either its price or the cost of accessing it is going to absorb a huge

1:17:40 portion of the benefit that you think you're going to get from investing in it.

1:17:44 And then as we talked about, you've already got exposure to a lot of this stuff

1:17:48 through public companies that have invested in those private companies already.

1:17:53 That's it.

1:17:55 All right, good discussion and and and I

1:17:57 think a nice elaboration on the original video.

1:18:00 I think we took it in a few different directions that were pretty productive.

1:18:04 So, well, it helps a lot having you guys here to chat with.

1:18:07 So, I think about that like is it repetitive to have the same topic

1:18:11 on my channel where I just talk about it myself and then also on the podcast.

1:18:16 Even setting aside additions like the additional

1:18:19 information from Avantis and and Professor Ritter,

1:18:22 I think having you guys giving your commentary

1:18:24 and interpretations as we're going through the topic,

1:18:26 it's like it's just makes it way more interesting and adds

1:18:29 a ton of elements that I I don't have on my own.

1:18:33 Yeah.

1:18:33 And plus, by the time you've released the video and we record this episode,

1:18:37 there's already a bunch of comments on the YouTube video

1:18:40 or in the channel that prompts new thinking and questions or clarifications.

1:18:44 So, it's worthwhile and not everybody listens to both.

1:18:48 It's another important point.

1:18:50 True.

1:18:50 Yeah.

1:18:52 All right.

1:18:52 We do have one review.

1:18:54 I'll read the disclaimer.

1:18:56 Um, does one of you guys want to read the You want to read the review, Dan?

1:19:00 Sure.

1:19:01 Okay.

1:19:01 We have a review from Apple Podcast to read.

1:19:04 Under SEC regulations, we are required to disclose whether a review,

1:19:07 which may be interpreted as a testimonial, was left by a client,

1:19:11 whether any direct or indirect compensation was paid for the review,

1:19:14 or whether there are any conflicts of interest related to the review.

1:19:17 As reviews are generally anonymous, we are unable to verify if the reviewer is

1:19:21 a client or disclose any such conflicts of interest,

1:19:24 which there won't be because we don't pay for reviews.

1:19:29 All right, so this one is titled Valuable and Insightful Podcast.

1:19:33 uh love the podcast and always find

1:19:35 the uninterrupted time to listen for content.

1:19:38 Not being a finance nerd, I find some of the topics over my head,

1:19:42 but over time my understanding is improving.

1:19:44 I appreciate the scientific approach and listening

1:19:47 always puts me in a higher thinking mindset.

1:19:50 I love the rent buy and happiness index type topics as well.

1:19:54 The banter before and after is great and really

1:19:57 like to hear what Cameron is up to.

1:19:59 His gentle nudges for Ben to share are always entertaining.

1:20:03 Shout out to Mark.

1:20:04 I really caught on to his dry wit and felt he was a great addition.

1:20:08 All the hosts are great.

1:20:09 Keep striving for topics from a Canadian

1:20:11 perspective as we all get more US influence.

1:20:14 I will say that the disclaimer we're all waiting

1:20:16 for has mainly overstate its welcome at this point.

1:20:19 I can listen to the factual one without skipping,

1:20:22 but the fun one is only good for a couple of listens.

1:20:25 Fair enough.

1:20:26 Um, could be time for an in-between version for those who can't easily skip it.

1:20:30 Just my opinion.

1:20:31 I've also tried to watch the YouTube, but maybe all my teams meetings at work

1:20:35 have soured me on this format for your content.

1:20:38 That being said, the positive, educational,

1:20:40 and informational benefits of your content far outweigh any of my critiques.

1:20:44 I will continue to be a fan of Ben, Cameron,

1:20:47 and company for as long as we have the privilege to keep learning and listening.

1:20:51 Thank you for such great shows.

1:20:53 from Jeff in it from Aurelia.

1:20:57 Interesting.

1:20:57 It's interesting that that uh this is a new

1:20:59 review and Cameron's barely in the podcast anymore.

1:21:02 This guy must have listened to older gone back and listened to older episodes.

1:21:06 Yeah.

1:21:06 But another shout out to Mark.

1:21:08 So, we got him into the episode a couple of times today.

1:21:12 So, Mark and his lasting impact on the podcast indeed.

1:21:17 So, uh All right, that's all I have.

1:21:20 Anything else from you guys?

1:21:22 No.

1:21:23 All right, see you next time.

1:21:25 Yeah, thanks everyone for listening and thanks guys.

1:21:32 Hey everyone, it's producer Matt.

1:21:33 Thank you so much for tuning in to this week's episode.

1:21:36 Before we sign off, here's the disclaimer you've been waiting for.

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1:22:06 However, each company has financial responsibility

1:22:09 for only its own products and services.

1:22:12 Nothing herein constitutes an offer or solicitation to buy or sell any security.

1:22:17 Occasionally, we tell you not to buy crappy investments in the first place.

1:22:21 But that's not the same thing as telling you to sell them.

1:22:24 This communication is distributed for informationational purposes only.

1:22:28 The information contained herein has been

1:22:30 derived from sources believed to be truthy, but not necessarily accurate.

1:22:35 We really do try, but we can't make any guarantees.

1:22:39 Even if nothing we say is fundamentally wrong, it might not be the whole story.

1:22:44 Furthermore, nothing herein should be construed as investment,

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1:22:50 Even though we call the podcast your weekly

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1:22:55 you shouldn't rely on us when making actual decisions, only hypothetical ones.

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1:23:13 It might not apply to all.

1:23:15 Honestly, you can probably ignore most of it.

1:23:18 All market indices discussed are unmanaged,

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1:23:25 which is a shame because it would be awesome if you could.

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1:23:37 Nothing herein should be construed as a guarantee

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1:23:42 Past performance is not indicative of or a guarantee of future results.

1:23:46 If it were, it would be much easier to be a Leafs fan.

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1:24:12 See you next time.