Earlier this year a friend of mine casually told me that she’s interested in buying shares in Neiman Marcus. “Shares?” I asked, assuming she meant shoes. “Yeah,” she responded with a raised eyebrow, “shares.” She went on to explain that there’s talk that the major retailer is heading toward an initial public offering (IPO) and that she wanted a piece of the pie for her own stock portfolio. I smiled, nodded, sipped my peppermint tea, and tried not to think about my own lack of financial investments before the topic changed.
Upon returning home, a quick Google search revealed that the luxury fashion store is indeed going public (the IPO was delayed in October), as is SoulCycle, another consumer brand I already regularly invest cash in without expecting any financial return whatsoever. SoulCycle plans to list on the New York Stock Exchange as SLCY, with an aim to raise $100 million. According to its IPO filing, the cult exercise class raked in $112 million in sales and $26.5 million in net income last year. This led me to ponder two things: First, if I were ever to start a share portfolio, should it include brands I’m already familiar with and love? Second: Where the hell do I start? Thankfully, there are professionals you can speak with for such advice, so that’s precisely what I did. Here’s what they told me.
Figure out your budget and how often you’ll invest.
Dominique Broadway is an award-winning personal finance expert who says that while you don’t need a ton of money to start investing, you should decide upon a lump sum—say, $500, and consider how frequently you plan to invest more.
“You could begin with the lump sum and add extra money each month such as $50, or you can start with investing small amounts over time, such as $50 per month or every two weeks,” Broadway explained.
Then, once you know how much you want to invest, it’s time to consider what you want to invest in (more on that in a sec). You can then open up an account in about 10 minutes at ETrade, or Broadway also suggests using Vanguard to begin buying shares of the investment you select. New, technology-driven brokerage start-ups like Robinhood are also making investing way more accessible (and affordable) for Millennials.
Invest in brands everyone loves, not that you love.
Laila Pence is a certified financial planner and investment adviser at Pence Wealth Management through LPL Financial with over 40 years of experience in guiding people on precisely this kind of thing. She told me that a major shift in technology is dramatically affecting which brands are successful, and which aren’t—and this is something to keep in mind when picking a consumer product to invest in.
For your own financial portfolio, it’s key to consider these wider industry trends. “When it comes to investing in a good idea, it is more important to look beyond the brand you love and look for the brand or product that everybody loves. The entire shopping experience has changed. So sometimes it is not about the brand so much as how you get to it or the experience around buying it,” Pence explained.
Yes, it can be smart to snap up shares of a brand that you and others love, but you have to watch to see if the company will be profitable. Michael Kors, Prada, and Coach have all been listed for more than five years, and their stocks are still valued higher than their IPOs, which likely makes their shareholders very happy people. “This is due in part to each companies’ quarterly earnings reports supporting its relative value over time,” Pence explained. Conversely, when the fashion companies didn’t meet earnings expectations, their values dropped.
Do the legwork.
Obviously, research is key here, but you need to know what you’re looking for in a potential investment. Yes, you’re aware SoulCycle is phenomenally popular with the fitness set, but does it have solid free cash flow (a figure that represents the money a company is able to generate after forking out the cash needed to maintain or expand its asset base) and the ability to grow without taking on too much debt? How will it stay relevant in the fast-growing fitness industry? You can find out this information by chatting with a financial adviser, reading a company’s public statements and IPO filing, and through free online resources like Investopedia.
“We like companies that have solid top- and bottom-line growth for the next three to five years,” Pence said, outlining some of the elements that increase the likelihood of stock performing well. “Companies that will stay relevant in fast-growing and changing environments, have solid free cash flow, the ability to pay a dividend, companies that can grow without taking on too much debt, with brand dominance and barriers to entry.” So if a company is the leader in its industry and it would be difficult for another brand to take that position, it could make a savvy investment opportunity.
Instead of picking the brand that’s hot right now, Pence also recommends backing a company that serves the brand and others in that marketplace: “Instead of investing in just a brand, we’d like to invest in companies that every brand has to go through to reach their consumers, such as Amazon (as market maker); Visa, MasterCard, and AmEx (as online payment options); or FedEx and UPS (as package delivery).”
When I asked about SoulCycle’s approaching IPO, Broadway told me to tread carefully. “Be very cautious when it comes to investing when a stock during its IPO. Stock prices typically go down after a company first goes public and the hype surrounding it is gone. However, it can still be a great time to invest in your favorite company,” she explained.
Invest for long-term returns, and be willing to take risks.
If you keep your money in the bank, you can pull it out any old time, but if you really want to see returns on your share portfolio, you need to invest for the long-term—at least three to five years.
When chatting with Broadway, she was really keen on driving home the point that, since I’m in my mid-20s, I should think long-term and take risks. “You have a very long time frame, especially if you’re saving for retirement. Don’t let fear prevent you from investing in more aggressive stocks, and don’t worry if your account value goes down—you have a long time to make up for any losses and then some,” she said.