The markets are bracing for the highly anticipated IPO of Twitter. So much so that people forgot how to spell and forgot that it hadn’t hit the market yet, see here. Whenever these hot deals get ready to go, retail investors start to reminisce on the internet bubble IPO craze and want to figure out how to get involved.
You see, the IPO apparatus is a fantastic revenue generator for the underwriters and a fantastic way for business owners to monetize a portion of their business. It can also be a great way for an investor to establish an investment in a solid company. But the big name deals, the last one being Facebook, which we wrote about at the time, can be a study in greed and misfortune for individual investors.
To be clear, we know very little about the details of the Twitter deal specifically, but we can speak about the process an individual must endure to be allocated shares, and the fact that in many cases, the deck is stacked against you. If you followed the link to our post on facebook, you know what we are talking about and we won’t waste your time by saying it again. Let’s just fast forward to see how it played out. The Facebook deal opened at $38 in May and by late August it traded at $18, that is clearly not ideal for an investor, and it isn’t surprising if you know how the process works. These deals get a giant amount of attention and hype and can spiral out of control very easily. Over subscriptions and high end pricing can skew the economics of these transactions in the blink of an eye. It also bears mentioning that even though “initial public offering” sounds like the first opportunity to buy these stocks, it is not the case at all. Many rounds of private investment have already occurred and a ton of money is already made by venture capital investors and the like by the time it rolls around to the IPO.
Now, in the case of Facebook, it isn’t all bad. The stock closed at almost $50 on Monday, so if you did buy the IPO, and rode the stock to $18 and back up, you’ve made a nice return, no doubt. Getting caught up in the hype and media blitz did not do you any favors and you had every opportunity to be patient and buy in at a lower level. The catch (and the pitch of a broker trying to sell the shares) is that you never know how these deals will play out. Twitter may price well and shoot up 100% and make a fortune for everyone who manages to get shares. As in anything, you never really know, and if someone tells you they do, run.
The point is that as an individual investor, you really do not be concerned with trying to play these deals. You and your advisor should be concerned with positioning your portfolio to best fit your goals in life, not a gamble on how well an investment bank is going to bring a hot company to market.