Facebook and its botched IPO is still a hot topic on CNBC and other financial media outlets. Facebook and Groupon are the two most recent “blockbuster” IPOs and both have been miserable flops to date.
Groupon made its debut in November of 2011 at $20 per share. It closed at $4.24 per share on September 4, 2012.
Facebook opened trading in May of this year at $38 per share. It closed at $17.73 per share on September 4, 2012.
While I realize hindsight is 20/20, there are several lessons an investor can draw from these recent large IPOs:
IPOs are risky investments. As my children might say; well duh! This goes beyond Groupon and Facebook. There are numerous examples of IPO flops and also IPOs that have been great investments. Google opened at $80 per share in its IPO in 2005. The stock closed at $681.04 per share on September 4, 2012.
Hype doesn’t equal a solid investment. Both Groupon and Facebook were the subject of intense media hype in the days and weeks leading up to their IPOs. Don’t listen to the hype and get caught up in it. Rather with an IPO or any investment do your homework. In the case of an individual stock holding understand the company’s business model. What factors will make the business prosper or flop? Are there barriers to entry for competitors? Clearly there have been few in the case of Groupon for example. Even with mutual funds or other managed investments, understand who is in charge, their investment philosophy, and review how they have done in various market situations.
IPOs are a payday for many people; you are not necessarily one of those people. In the case of both companies the IPO was a means for the senior management, early investors, key employees, and the investment bankers to realize a big payday. This isn’t necessarily a bad thing, nor does it imply that anyone is doing anything wrong or unethical (any allegations about the Facebook IPO notwithstanding). My point is that whether with an IPO or in dealing with a commissioned financial sales rep who is trying to sell you an annuity, understand their financial motivations.
Investing is not about the new trendy stock or fund. If you are investing (vs. speculating or day trading) don’t worry about every new stock, fund, or ETF that comes to market. Focus on your overall financial plan and tailor your investment strategy towards achieving the goals laid out in your plan. If something new comes along that you conclude after careful research has a place in your portfolio, then go for it.
It isn’t different this time. I vividly recall the late 1990s when the Wall Street Pundits claimed that the old rules didn’t apply when evaluating many tech companies. Don’t be concerned with their lack of a balance sheet or even a credible business plan. Fast forward to early 2000 and we know how well that turned out. Technology has made even greater strides since then. Businesses that we never imagined seem to pop up daily, many of them are innovative and successful. But investing in today’s new companies is not different. Before committing money to any investment understand why this is a good place for your money.
I am not an IPO expert and have never invested my own money or any client money in one directly. Given my heavy use of index funds and ETFs my clients certainly have money indirectly in Facebook, Google, and perhaps other former IPOs. Investing is about logic, common sense, and research. This is especially true if you do your own investing. Even if you use a financial advisor, when they suggest a new investment and/or that you sell an existing holding ask them why. What is the logic behind their recommendation? Why will I be better off?
Please feel free to contact me with your investment and financial planning questions.
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