Certain terms just have the natural ability to capture the attention and imaginations of the investing world. Perhaps sitting at the top of that list is the initial public offering – most commonly referred to as an IPO. Like a stock split, merger, or acquisition, an IPO is often viewed as the personification of capitalism and the dollar-paved roads that traverse the equity markets.
Of course, particularly in the case of something as combustible as an IPO, it’s always important to view such events from a realistic and appropriate perspective. While it is true that an IPO can offer investors extraordinary appreciation in a very slight amount of time, there are just as many disastrous stories behind IPOs as there are lucrative ones.
An IPO occurs when a private company – after completing a fairly exhaustive set of compliance and legal requirements – initially offers shares of ownership to potential stockholders through the open market. Often, IPOs are met with splashy headlines as the investing world seizes the opportunity to own shares of companies that hold tremendous potential but were previously only available to private equity investors like hedge funds or venture capitalists.
The Sobering Truth About IPOs
While it’s certainly true that some IPOs afford the investment world extraordinary levels of growth within a short time frame – a relatively rare occurrence in large, well-established companies – IPOs are more likely to be the songs of financial sirens dashing metaphorical investment sailors into the jagged rocks of a turbulent marketplace.
Sadly, for every Alibaba or Facebook IPO, there are dozens of examples of IPOs that failed right out of the gate and wreaked havoc on portfolios that failed to keep them in a proper perspective. In fact, historically speaking, 4 out of 5 IPOs are likely to underperform their associated benchmarks in both the short and long term.
Furthermore, IPOs tend to be a well-defined line of demarcation between the haves and have-nots of the investment world. Fair or not, the chances of the typical individual investor being able to get into the earliest stages of an IPO are exceptionally slim. For the most part, IPOs are reserved for the deep pockets of institutional investors that purchase large blocks of the public offerings with one fell swoop, leaving the average investor waiting for the leftovers of early profit takers.
The best way for the individual investor to look at an IPO is like a high-end product that you see while window shopping in a very exclusive mall. The price and exclusivity of that product makes it – for all intents and purposes – unattainable until it arrives in outlet stores and, even then, most likely isn’t all it’s cracked up to be.
Jeremy Wallace is founder and chief investment officer at Wallace Hart Capital Management, an independent financial services firm committed to offering comprehensive advice and customized services. Jeremy has 20 years of experience in the financial industry and is passionate about helping clients preserve and enhance their wealth so they can pursue their passions. Jeremy graduated from Emory University with a degree in international economics and a certificate in financial planning. Outside of the office, Jeremy spends most of his free time with his wife, Julie, and their three children, Isabel, Lincoln, and Reid. He is an avid Chicago Cubs baseball fan, and he enjoys golfing with his wife and traveling with his family. Learn more about Jeremy by connecting with him on LinkedIn.