Affiliate Ads support this blog:

Saturday, 11 May 2019

Uber provides another lesson in the dangers of investing in IPOs

For some strange reason many people like to invest in IPOs. For some it may be the promise of buying shares 'without brokerage' (as if a few dollar brokerage is really going to make much difference in the long run. And on the downside, any 'mum and dad' investor that buys shares via an IPO because they don't have a brokerage account, will end up having to set one up anyway, when they eventually want to sell the shares - unless they go through the complication of finding a willing buying and doing an off-market transfer). I suspect that the real reason most people buy shares via an IPO is the forlorn hope that they will get in on the 'ground floor' of the next Microsoft, Apple, Amazon or CSL - and make their fortune.

The reality is that most IPO are NOT the 'ground floor' - that was during the pre-IPO phase when the owners of the private company got injections of capital in exchange for parcels of ownership while the company was still privately held. By the time the IPO comes around, the pricing is usually aimed at getting the maximum possible funding from 'the public' and transferring that wealth to those that either a) started up the company, or b) invested in the company before it 'went public'.
There are exceptions to this of course - where a company has 'gone public' and then gone on to bigger and better things, making those that bought shares in the IPO a small fortune. But the odds are against you:

  • More than 60 percent of more than 7,000 IPOs from 1975 to 2011 had negative absolute returns after five years in the secondary market, according to a UBS analysis using data from University of Florida professor Jay Ritter. [1]
  • Uber is a recent example: It opened trading at $US42 a share on Friday - or nearly 7 per cent below its IPO price of $US45. And its shares closed at $US41.57, costing IPO investors a 7.6% loss in one day - and that's before taking into account the brokerage cost if they want to offload the shares.
Now, Uber may end up being a wonderfully profitable company, rather than just a loss-making disruptor, but if you are an investor rather than a speculator, its not the place to make serious investments.

Investing in IPOs can be fun, but should be approached as the gamble they are - never 'invest' more than you can afford to lose, don't chase losing 'bets', and be willing to 'walk away' if it doesn't go the way you expected, rather than 'holding on' and hoping it might 'come good' in the long run.

I've dabbled in IPO shares for fun, and even put some money into a pre-IPO 'startup' company (GEN) that seemed likely to cash in on the internet boom back in the late 90s (but then went broke before listing), but I've always been aware that these were highly speculative gambles and made token investments that I could afford to loose without too much angst.

References:

[1]: https://www.cnbc.com/2019/04/03/dont-be-fooled-by-the-unicorn-hype-this-year-most-ipos-lose-money-for-investors-after-5-years.html


[2]: https://www.smh.com.au/business/markets/tough-week-to-go-public-uber-flops-on-its-wall-street-debut-20190511-p51m9o.html


Subscribe to Enough Wealth. Copyright 2006-2019
x

No comments: