Stay away from investing in hot new IPOs to buy instead look for high-quality stocks that can thrive in your portfolio for years to come
Today’s new technologies are a lot more numerous and powerful than the ones that made a great company and a great investment in the last century. They will open up vast new opportunities for investors, not to mention vastly better living conditions for everybody on the planet.
No one can predict how all this will turn out, of course. But you don’t need to try. All you need to do is arrange your investment portfolio so that you profit from it. In our publications, we try to help you do that.
For one thing, that’s why we keep reminding you to stay out of games where the odds are against you, and don’t get drawn into the frenzy around new IPOs to buy.
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Here’s the best way to get in on the best new IPOs to buy in a way that won’t put your portfolio at risk
Keep in mind that with today’s boom in new stock issues, or IPOs (Initial Public Offerings), conflicts of interest in the financial industry ensure that the odds are against outside investors, in general. Statistics bear this out.
Even with attractive new issues, it’s best to stay out of them. If a new issue has genuine long-term investment appeal, it will be an attractive buy for months or years after it reaches the market. A good practice for investors interested in IPO investing is to set up a watch-list of potential new IPOs to buy. After six months to a year, check back to see how these IPOs performed. You may be surprised at what you find. This would be the time to re-evaluate the stock to see if it has a place in your portfolio.
Don’t get caught up in the “hot new IPOs to buy,” unless maybe it’s a privatization
Our rule on IPO investing (Initial Public Offering investing) or new stock issues is simple. We generally stay out of them. That’s because new stock issues typically come to market when it’s a good time for the company or its insiders to sell. That may not be a good time for you to buy. In fact, it’s often a bad time for you to buy, judging by academic studies of IPO investing performance.
In addition, brokers reserve their best new issues for their biggest and most co-operative clients—those who do a lot of trading, or who buy every new issue the broker offers them. If you rarely buy new issues, you will rarely if ever be able to buy a significant portion of the best new issues. Brokers know how attractive the hottest new IPOs to buy are to their clients. With all the hype, investors are eager to buy these particular types of investments. Brokers make greater efforts to cash in on that demand by bringing more of the investment to market. That means the average quality of new issues in popular market areas tends to go down while prices get bid up, sometimes to ridiculous heights. There are exceptions, of course. But this combination of rising prices and falling investment quality leads to bad deals for investors.
In the past, however, we have made money by making an exception to our IPO investing rules. IPOs are more attractive and often easier to obtain when they are part of a privatization effort—when a government sells a government-owned enterprise to investors.
In privatizations, governments often price the new issue at an attractive level that almost ensures that buyers will make money. That’s because governments are less concerned than a private seller would be about getting a good price in a privatization. Instead, they are more concerned about maintaining the goodwill of buyers, for political reasons. Rather than try to get the best price, they may sell a privatization at a good price to a wide range of individual buyers, to win goodwill and votes in the next election. That leads to two opposing IPO investing rules—we generally avoid new issues, but new issues of companies being privatized can be a good deal.
Use our three-part Successful Investor approach to bypass IPOs and make better stock picks
Invest mainly in well-established, mostly dividend-paying companies;
Spread your money out across most, if not all, of the five main economic sectors (Manufacturing, Resources, Consumer, Finance, Utilities);
Downplay stocks that are in the broker/media limelight.
IPO investing can involve controversial dual-class shares where founders have out sized voting control. What are your thoughts on dual-class shares like these?
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