M4 Support

Don’t pretend IPOs are “investments”

Posted November 9, 2011 at 2:47 am

by Carl Richards

Initial public offerings get a lot of coverage, and why not? Everyone loves the idea of taking hard-earned money and using it to gamble in the hope that they’ll end up owning the next Amazon or Google and not Pets.com or Demand Media.

What often gets lost when we get all excited about a hot new I.P.O. is the cartoon porn pictures pesky fact that most of the time buying an I.P.O. is a great way to lose money.

Wall Street Roulette

BusinessWeek did a little math on the 25 hottest offerings of 2010 and 2011. The results don’t look so good.

There’s a lot of red: after the initial “pop” — the jump from the offering price to the open — 20 of those 25 tanked. Many have fallen 50 percent from their first day opening price in the stock market (one high-profile example: Demand Media, down 68 percent since its January debut), a few more than 80 percent.

But those were just the “hot” offerings of the last two years. What about the rest of the I.P.O.’s? What happened to their prices after that first day of trading?

The total for all 333 I.P.O.’s from 2010/11 for which Bloomberg has data is minus 11.1 percent.

The Odds Aren’t in Your Favor

And in case there is any doubt, almost every study I can find on the performance of I.P.O.’s shows the same thing [continue]:

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