Should You Invest in IPO?
Over the last three years, there has been a rising number of IPO in the United States. From 105 IPOs in 2015 to 190 IPOs in 2018. Accordingly to Ernst and Young, as of Q2 this year, there are 118 IPOs. If we continue on this momentum, I believe there will be more than 200 IPOs in 2019.
A question I often received is,
“Hey, should I invest in this IPO?”
Most people asked this question, believing that IPO presents a good investment opportunity as IPO tends to make money in the future. Of course, when you refer to the stocks like Facebook, Google and Amazon, everyone wished we invested in them when they first IPO-ed.
However, the real question is,
Do MOST IPO make good investment?
As an investor, whether you like it or not, you are investing in chances. When you invest in a company stock, you believe that for some reason, valid or not, the price of the stock will increase over time. However, you cannot say that with 100% certainty. There is always a chance that the price of the stock will not increase.
Therefore, as investor, you look for traits to INCREASE your chances of being correct, such as investing in great businesses with growing profits. Because studies have shown that these traits tend to produce better investment return over time.
Hence, when you choose to invest in an IPO, you are believing that most IPOs make good investment return.
Can we find evidence for that?
Most agree that most IPO tends to end up making losses. You can read them here, here, and here.
While their numbers vary, they seemed to agree that only about 25-30% of all IPOs make investment profit in their first years.
This means you only have a 25-30% chance of being profitable when you invest in IPO upon their first launch.
With this kind of odds, you would do better playing blackjack in the casino. That has a winning chance of over 40%. (Yet, the casino still wins most of the time.)
Why Are People So Interested in IPO Then?
In my view, I think the main reason behind all the interest in IPO is MARKETING!
The excellent marketing which is driven by the bankers and company management.
Slow down and think about it. Why do companies IPO in the first place?
It is to raise money from YOU! So it is only natural that they want you to buy up their stock price when it launch.
I heard a quote sometime back, so I am paraphrasing here. But you get the idea.
“You may survive running through a gun powder factory with a lit match, but you are still an idiot.”
Anon
To end off, of course you can get very rich if you invest in a good IPO, just be aware that your chances of success is very low.
So what is your experience with investing in IPO?
Share it with us in the comments.
