As a confirmed Boglehead (I’ll explain later), my heart starts beating like a rabbit if I even think about buying a stock the first day it hits the open market.
I can’t help it. Breathlessly jumping into the frenzy for the next Snap, Google or Facebook goes against my instinct for patience and being a measured investor.
So here comes Lyft, which went public Friday and immediately jumped more than 20% on its first morning of trading. (It closed the day up 8.7%, at $78.29.) Uber, Slack, Airbinb, Pinterest and Palantir Technologies also are teeing themselves up for the open market. WeWork, SpaceX, Flipkart, Stripe are also in the conversation.
My father-in-law warned me a couple of decades ago against buying a stock on its first day of sales — known as its initial public offering, or IPO. Or even the first week. Or the first six months.
“Wait it out,” he said. “See how the company performs as a business, follow the stock, then make an informed judgment.”
Better yet, he said, stick with mutual funds.
“Wise advice,” said Kathy Smith, who manages IPO ETFs at Renaissance Capital. “You don’t want to get caught up in that emotional vortex.”
I own a handful of individual stocks. So, by definition, I buy some shares — sooner or later. Just not on the day of the IPO. And I hardly ever sell. Most of our investments are in mutual funds.
I called around and asked some people whether it’s a good idea to avoid IPOs.
One investor, who spoke on the condition of anonymity because the investor’s firm works with companies to take them public, said if you are fortunate enough to work with a brokerage (or underwriter) that will sell you shares before the IPO, you should get in on it. These early birds can make a profit on the first-day bounce.
“They are the flippers,” Smith said. “Those who managed to get the shares before the IPO, and if there is a first-day run-up, they dump. They say to themselves, ‘I gotta get out of here. I got to take a quick profit.’”
Some hold on for a long time and make a lot of money. Some lose when the company doesn’t work out.
There was a time during the dot-com boom when it seemed as though every stock offering sold like crazy. Remember Broadcast.com? Pets.com? Yahoo?
“Success in IPOs means you get the cycle right,” Washington investor Michael Farr said. “There are cycles when everything that goes public goes up. In the mid- and the late ‘90s, everything that went public in tech and the dot-com space went up. It’s much more about the appetite for the latest hot thing than it is the merit for the latest hot thing.”
For most of us average Joes, it’s better to wait. You don’t know how these companies are going to perform.
S&P Global Market Intelligence examined companies that went public at a value above $500 million since 2009. Of 94 companies it was able to examine, 65% showed a positive change in the stock price after six months from the IPO. At the end of a year, 62% showed a positive change in the equity price.
Take Facebook — “a massive roller coaster ride,” said Nicole Tanenbaum, chief investment strategist at Chequers Financial Management. The social-media giant IPO’d in 2012 at a $38 share price. It has been a rocky — albeit rewarding — ride. A year later, Facebook shares were $25.76, a loss of 32% compared with the IPO price. Facebook shares today sell for about $165.
Snap, on the other hand, hit the open market two years ago at $17 a share. Shares surged 44% the first day. A year later, the shares were up 6%. Snap was recently selling for about $10 a share — a significant drop.
“Buying an IPO means you have to invest without having seen a real earnings history,” Farr said. “While short-term hot money can be made by those who want to flip IPOs, this is not a game for Fred and Ethel looking for long-term value.”
The average investor can’t get in on the best deals anyway.
“They tend to get snapped up by institutional investors,” said Ed Yardeni, president of Yardeni Research. Think the big mutual funds, big brokerage houses, banks etc. “Especially the hot deals. It’s great to hear about some of these companies coming public and having a double-digit gain during the first day of trading. But very few individual investors can buy enough of the deal to make it worthwhile.”
So-called unicorns, such as ride-hailing services Lyft and Uber, have been around for years and grown revenue — if not profits — as private companies.
Lyft stock IPO’d at $72 per share. That would value the company at well over $20 billion. Its rival, Uber Technologies, which also has filed paperwork for an IPO, could hit the market at a $75-billion valuation or even $100 billion-plus, according to some reports.
Amazon, one of the most valuable companies in the world at nearly $900 billion, went public in 1997 at a market value of nearly $500 million.
Neither Lyft nor Uber has made a profit, but some private investors have made a ton. Some early private investors in Uber who had the resources and contacts — and a stomach for risk — have been selling their shares in the 10-year-old company. Its founder cashed out $1.4 billion of his private stock about a year ago.
Companies about to go on the open market or the underwriters can impose lockup requirements that prevent insiders — management, employees, board members — from selling shares for a period of time after the IPO.
Still, I worry that when insiders sell, they know something I don’t.
I asked Peter Fitzgerald, a former U.S. senator and now chairman of Chain Bridge Bank, what he thought of buying freshly minted stocks. Fitzgerald is a Boglehead, which means he subscribes to the view of the late John Bogle, founder of Vanguard, who changed the course of investing by advocating low-cost index mutual funds.
“The average investor shouldn’t speculate in IPOs,” Fitzgerald told me. “By buying broad-based, total-market index funds, the investor gets proportionate exposure to new issues. Outsize exposure to new issues or IPOs is inappropriate for long-term investors.”
Thomas Heath writes a column for the Washington Post.