Ride-sharing giant Lyft had its initial public offering (IPO) last week. Archrival Uber and other big-name, billion-dollar techies should follow soon. Investors see big bucks: They’ll buy an IPO and ride the next Amazon to unfathomed heights.
In the 1980s, that dream meant getting in on the ground floor of the next Apple. Now it’s the next Google or Facebook.
My advice: Don’t waste your time — or money.
In my 1987 book, “The Wall Street Waltz”, I detailed why IPO really means “It’s Probably Overpriced.”
Thirty-two years and one huge dot-com crash later, many missed the memo. Folks only remember the super winners like Apple and Intel. They forget the flame-outs like Pets.com, Webvan and, well, the majority. Average all IPOs, and returns are sad. Early booms usually bust.
University of Florida professor Jay Ritter studied IPOs launching from 1980 through 2017. The facts? After the initial pop, IPOs trailed similarly sized peers by an average 3.3 percent a year over their first five years. As with most speculative investments, a few winners mask legions of laggards.
IPOs often rise out of the gate, sometimes hugely. Thank investment bankers for that. Those handling the IPO get big bucks for hyping the sale and attracting buyers. So they whip up a mindless frenzy. The excitement and lure of magic returns suck in otherwise rational folks. The party can last days, even weeks, as stories of quick gains attract suckers who hate missing out. But when it stops, the stocks often get clobbered. Even long-term winners like Apple and Facebook spent time in the wilderness after debuting.
One problem: The companies’ and buyers’ incentives aren’t aligned. An IPO has two main purposes: raising money and giving early backers a big payday. That requires a high price — too high, usually, to be priced well for buyers. Even when the price does pop, by the time retail investors can buy, the new stock has typically changed hands several times, eating up much of your potential gain. The early birds got the worm.
No stock bubble
That IPOs over-price is actually good news for investors now. It is abnormal, relative to history, to have so many huge companies that haven’t “IPOed” yet. How long have we heard Lyft, Uber and Airbnb IPO chatter? Years! That’s bullish for stocks overall. That the entire group of them in recent years didn’t find fancy pricing on public markets tells you stocks weren’t overvalued. No bubble here.
The presumed 2019 IPO rush isn’t reason to sell, though. Yes, IPOs often frenzy near market peaks. But when quality firms with strong sales and business plans first start going public in numbers, it signals a healthy latter-stage bull market. The dangerous time is when investment bankers are pushing slop with scant sales or hopes of ready profits. The 1990s demonstrated this.
According to Professor Ritter, IPO issuance peaked in 1996, with 677 new offerings. By 2000, when stocks peaked, there were only 380 IPOs. The difference? Those mid-1990s IPOs were higher-quality firms, overall and on average. The few big successes among them drove a mania for more IPOs, leading to the late-decade slop crop, when new issues blew their cash more often than Austin Powers said, “Groovy baby.”
Today’s impending IPOs aren’t so scary, with positive cash flows and long-term business plans. Moreover, investors aren’t blinded by euphoria. There is more than abundant skepticism now — about everything.
But instead of gambling on IPOs, just own stocks. Benefit from the bull market that inspires IPOs. Be an investor, not a speculator.
Ken Fisher is founder and executive chairman of Fisher Investments, author of 11 books, four of which were New York Times bestsellers, and is No. 200 on the Forbes 400 list of richest Americans. Follow him on Twitter: @KennethLFisher
The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.