You Might As Well Go To A Casino; Snapchat and other IPO’s
Snapchat has been publicly traded for roughly 3 months now, with much fanfare leading up to the first day of trading. After an initial first day pop as high as $29 a share, the stock has since slumped well below the opening price of $24. Maybe the shine wore off after the company reported losing over a Billion dollars in the first quarter. Or, maybe investors decided it shouldn’t be worth more than roughly half of the S&P 500 companies. Who knows. But what we do know is that selecting winning IPO’s is hard.
News headlines and investors themselves routinely go craziest for the NEW stocks (Initial Public Offerings). Trading volumes confirm this. Recently, web & technology based businesses have been some of the highest profile IPO’s out there. However, most of their long-term returns have been boom-or-bust. Here’s a look at some notable company IPO’s and recent returns:
Why do so many IPO’s fail to live up to expectations? JR Ritter is a finance professor who has studied IPO returns back into the 70’s. According to Ritter, this is mainly due to over-optimism of investors, and firms intentionally going public in hot markets (essentially asking investors to “buy high”). His research suggests, since 1980, Initial public offerings returns’ have (on average) lagged the value index by nearly 18% in the first 3 years following the offering.
It’s human nature to assign more value to something new, and less value to something tried and true. When choosing your investments, it’s important to identify this hardwired bias. It might save you a lot of money on “the next hot thing”.