Unless you have been living under a rock, you are aware of the IPO mania around names like Beyond Meat, Uber, Lyft, Pinterest, Zoom, and Smart Dental – to name a few. None of these names were able to live up to the hype. Oh, sure, Beyond Meat soared up to the 200 level, and then it came crashing down to Earth in a hurry.
And this underscores my advice: don’t get sucked in!
IPO mania is all smoke and mirrors
IPO’s are essentially a popularity contest. If you hold stocks for the long-term, you can pick through the names, apply some fundamental rules of valuation and then decide whether or not to jump in. If you’re a short-term trader, you will likely get burned.
The mania is a big smoke-and-mirror show. Valuation is often wildly out of step with the company’s actual worth, and profits are often years away.
IPO’s capture our attention, because every investor and trader wants to invest in the next Apple, Google or Facebook.
Wouldn’t you have loved to buy into theglobe.com when went public in 1998? You may not remember this company, but it holds the record for biggest first day gain ever: more than 1,000%.
A ROI on like that gets everyone excited. It could be their ticket to riches!
My experience with IPO’s
I dabbled a few times in IPO’s back in the late 1990’s. My biggest success was InfoSpace, an up-and-coming wireless company. When I asked my broker for a small allocation of the stock, I was allotted 100 shares at the IPO price of $15. I held these shares for nearly 2 1/2 years. During that time, the stock kept going higher and split four times. I ended up selling 1,600 shares at $150. No, I did not buy any more shares. I was quite happy with a return of 16,000%!
Naturally, my experience is quite unusual. It’s rare to time it right and strike it big.
Back in the dotcom days, money was flowing into IPO’s like water out of a fire hydrant. Nobody cared about a company’s profit potential. Traders just wanted to make money quickly. This greed caught up with everyone. Markets crashed, and the IPO market dried up like the Sahara Desert.
Greed never goes out of style, so don’t expect IPO mania to change anytime soon. Nearly 20 years after the dotcom implosion, the industry boasts more investors and traders who have access to more data.
Today’s companies must prove themselves worthy of their valuation (cough, WeWork, cough), or suffer the fate of dotcoms like GoPro and FitBit, which have been tossed to the side like roadkill.
