Should you be chasing shares of SpaceX? How about Anthropic and OpenAI if and when they go public later this year? To get to an answer, let’s explore the various meanings of “IPO”.
These three letters – I, P and O – excite emotions like few others in finance. Elon Musk’s rocket company launched an initial public offering this month that has made Musk a trillionaire while instantly minting millions and even billions for many of his friends and employees.
Now, investors are salivating over more blockbuster IPOs that could land in the months ahead: OpenAI, Anthropic, Databricks and Anduril among them. Yet history shows that buying into public debuts routinely brings more failure than success. Beware the hype.
Current aspirants sport flashy Silicon Valley and artificial intelligence themes. Their arrival isn’t a coincidence: Tech and AI sentiment has run hot for many months. Founders and early investors want maximum benefit when selling ownership stakes to the public. Enthusiasm juices prices.
This creates a tension: Founders crave selling high, while IPO buyers crave getting in low. Which group likely knows more about these firms? Add in investment banks’ splashy marketing roadshows and the knowledge divide broadens. Hence what I detailed in my 1987 book The Wall Street Waltz: “IPO” actually stands for “It’s Probably Overpriced.”
Yes, some IPOs leap early like SpaceX, as investment banks misjudge demand and shortchange sellers and the firm. Ideally, the first day should be flat—rare! But still rarer, history shows, are IPOs that live up to their hype in the longer term.
Let’s consider a few stats: Since 1990, 52% of newly listed firms lagged the S&P 500 their first month by a median -0.3%. Three months out, both metrics worsened – with 60% lagging by a median -5%. Six months? A clear pattern is emerging and it isn’t pretty – with 63% lagging by a median -11%.
A year and two years out, it’s even worse with the lag rate nearing an ugly 70% – and by decidedly uglier medians of -20% and -35%, respectively. Yuck!
Time is usually your friend with stocks. Not so with IPOs. Of the 48% that led in their first month, 56% of those lagged a year out. Love the long-term future earnings of today’s darlings? Fine! But is that in the next 3 to 30 months, the timeframe stocks typically price? Doubt it. Regardless, history shows better entry points are highly likely after IPO hype fades.
Some say today’s mega IPOs are different, hawking them as “can’t miss” opportunities. But the reality is, as 19th century retailing legend John G. Shedd famously observed, “Opportunities are seldom labeled.” Name recognition also means little. Remember Facebook’s 2012 faceplant? Or Uber’s uber-underwhelming 2019 debut? Ask yourself: What do you actually know about these stocks that others don’t? Anything?
And if they sputter, how quickly can you escape? Brokerage rules often restrict flipping IPO shares within 30 days. Usually, investors benefiting most from IPO spikes are those allocated shares before the listing. But even those that are able to buy at the issue price often can’t flip fast enough because they’re tied to lock-up rules.
Meanwhile, many IPOs’ early-stage institutional and private owners surely salivate at chances to lighten up some. Who goes first?
Even happy outcomes breed risk, as IPO also stands for “It’s Priming Overconfidence.” If your IPO buy pops, the dopamine hits hard – feels great – heroin for those onboard. Pride swells. More IPOs, please! But the data prove this only increases the odds that your overall returns will suffer. Think you’ll emerge unscathed? It’s pure overconfidence.
Then, amid the frenzy, can you get enough shares for it to be a game changer financially? Unlikely, and if so, yet another problem arises: Concentrated positions amount to gambling. Successful investing isn’t some get-rich-quick, Vegas-like wager. It’s a get-a-great-retirement-gradually journey requiring patience and discipline.
Another way to unpack “IPO”: “Increasingly Puffed-up Optimism”. While we aren’t yet broadly in euphoria, expectations are frothy for almost everything related to AI and US tech. Hence firms lining up to go public. But elevated sentiment makes positive surprise still harder to attain. That favors extra caution.
Remember: For every buyer there is a seller, and one of them is wrong. And in history, there are no legendary investors – zero – who have ever been known for their astute IPO picks. So why do you think you can do better?
Hype is hazardous. Heed the many meanings of “IPO”.
Ken Fisher is the founder and executive chairman of Fisher Investments, a four-time New York Times bestselling author, and regular columnist in 21 countries globally.
