If you’ve been tuned in to financial news over the first half of the year, you’ve undoubtedly heard and read about the stream of initial public offerings (IPOs) hitting the markets over the past few months. From ridesharing behemoths to producers of plant-based meat alternatives, the majority of these share offerings have belonged to emerging tech companies which have shown tremendous growth and now seek public investment following multiple rounds of private funding. These companies often see stratospheric returns in their initial days of public trading before cooling and returning to Earth. This post will address the recent IPO craze from our perspective and highlight why we steer clear with our investors’ capital.
When an individual’s portfolio has reached a certain numerical value (i.e. $1 million, $2.5 million, $5 million, etc.), he tends to lock-in that valuation in his mind and is unwilling for it to move lower – at times even desiring to move to cash in order to preserve the valuation. If the market or his stock declines below the level in which he has locked-in the valuation, this can lead to irrational behavior driving the investor to sell his stocks at a lower valuation while also losing the dividend income from his investment.