With a lot news over the last few weeks about the ride hailing service Lyft going public, we thought we should revisit the acronym IPO.
IPO stands for Initial Public Offering
At Creekside we believe a more accurate representation would be “It’s Probably Overpriced”
This is not always the case, but when Wall Street gets excited by something new, investors should get nervous. The more buzz a new offering creates on Wall Street, the more individual investors get interested and excited and the easier it is for the bankers behind these offerings to make money.
An IPO is meant to fund the company and reward it founders and make money for the people who are handling the deal. Not a lot of thought goes toward the individual investor during the IPO process.
The individual investor is at the back of the line when a company goes public. The investment banks are much like an auctioneer. Their goal is to get the crowd whipped into a frenzy and get the bidding as high as possible.
The public always remembers the successful IPO’s like: Google, DocuSign, Microsoft etc. What the public forgets about are all of the lousy companies which fade away or languish for a decade. Does anyone remember Dr. Koop.com, eToys and Pets.com from back in the .com boom days? More recently we have seen companies such as Groupon and Zynga go public and flounder. Bottomline, there are a lot more failures than successes in the IPO Marketplace.
What does one of the better investors of the last 50 years think of IPO?
At Berkshire’s 2016 annual meeting, Buffett said “You don’t have to really worry about what’s really going on in IPOs. People win lotteries every day…” He went on to remind listeners that just because a strategy works for one investor doesn’t make it a good idea. “If they want to do mathematically unsound things and one person gets lucky… it’s nothing to worry about,” Buffett said. “You don’t want to get into a stupid game just because it’s available.”
It is virtually impossible for individuals to participate in IPO’s prior to trading in the public markets.
From our perspective…Caveat Emptor