Steer clear of IPOs
Don’t buy into the hype. Here’s why you should shut your eyes and ignore newly public companies.
It’s been a dull year for the investment bankers who take companies public. In America, there have only been 96 initial public offerings (IPOs) of common stock this year. Yet, when a new company goes public, investors still get giddy. They’re desperate to get in early on the next Google or Facebook. And they’re willing to roll the dice. The question remains: is it wise to invest in IPOs? The answer is: No. As a general rule, you should avoid them.
You should steer clear of IPOs because freshly public stocks tend to underperform the broader market. If you have some cash burning a hole in your pocket, put it into the S&P 500 index of big American companies, not an IPO. Over the last decade, the Renaissance IPO index of freshly public companies returned 75%. That sounds decent, but it’s a full 170 percentage points less than the S&P 500’s total return in that same time. In addition, the IPO index’s returns were 1.5x as volatile. Investing in something that produces a fraction of the retur…