Missing IPOs Is Okay

SpaceX has had quite an exciting first few weeks of trading. Space Exploration Technologies Corp. (SPCX) started trading as an initial public offering (IPO) on June 10th and shot up nearly 40% in just a few days, hitting roughly $200 before pulling back sharply. As of June 26th, the stock sits around $153. If you bought at the peak, you're already down more than 20% in under two weeks. If you bought at the open, you’ve roundtripped.

Who knows what will happen in the coming weeks. But that type of activity is not terribly unusual. That's actually pretty normal for high-profile new offerings.

The excitement around a major IPO is real, but so is the volatility that follows. There's a predictable cycle where the excitement builds, early buyers get in, retail investors pile on at the top, and then the air slowly comes out. Sometimes quickly.

Here’s a table looking at 24 of the biggest IPOs of the last 15 years.

The median one-year return was -31%. The median max drawdown from the first close price was -53%. There were some winners, but those are the exceptions, not the rule. IPOs aren’t always bad investments. But the best time to buy great companies is rarely the day everyone is most excited about them.

Consider Amazon or Apple or Microsoft. If you missed the IPO on any of those, you still had decades of opportunity to buy at a price that turned out to be very reasonable in hindsight. The companies that have truly created long-term value have given patient investors plenty of chances to participate, well after the initial frenzy faded.

For most long-term, diversified investors, sitting out the IPO isn't a mistake. More often than not, it's the right call. And if a company is as strong as the hype suggests, and you want to own a stock (I generally advise against individual stocks), there is often a better entry point down the road.

Happy Planning,

Alex

This blog post is not advice. Please read disclaimers.