Gambling on IPO's
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Have you ever wondered why so many people lose a lot of money on IPO's? Warren Buffett's number one rule is, "Never lose money." His second rule of investing is "Never forget rule #1." So if we want to be rich like Buffett should we not also invest like Buffett? In Beat Your Broker, I out lined the only reasons to ever sell a stock for a loss, and that is to get out if the company is shutting its doors and the stock is no longer going to be traded, or if you are facing losing a huge percentage of your investment capital.
IPO's do not have a track record. You cannot simply click on their chart and see what their performance has been over the last twenty years. All you can do is look at the revenue and profit margins, and make your best guess whether you think it is a viable investment. The problem all too often with IPO's are that traders in general are looking for the next Google Inc (NASDAQ: GOOG) which came on the market during it's IPO at $85 a share and jumped to $100 a share and hasn't looked back since. We all would love to be in on the next huge stock success like that, but the reality is different and much more grounding.
Three recent IPO's that a lot of traders lost money on are Pandora Media Inc (NYSE: P), YELP Inc (NYSE: YELP), and Facebook Inc (NASDAQ: FB). Now the big question is why did people lose money on these companies? Did the companies go under? Are the companies in danger of going under? The answer is no. People lost money on these IPO's because they are sucked into the get rich quick scheme and Vegas style investing of day trading. They throw a bunch of money into a stock position hoping that it pops. You should never invest like this, its kamikaze!
Pandora Media disapointed day traders after it popped from $16 a share to around $20 and has continually dropped to below $9 a share as of May this year. Pandora has done what I call three false starts since it's IPO. The chart looks really good for long term investing as they have grown revenues over 81% while the shares have increased in price to $11.79. YELP rose 64% on its IPO only to crash from $31 a share down to $14.10. In the last few weeks it has rebounded back to over $21 per share while sporting revenue growth of 70%. The down side is their profits are way down in their industry. Facebook had a lot of hype coming out of the gate at $45 per share and then was slammed by all kinds of negativity from the media and analysts resulting in a plunge to $25.52. The shares are currently priced around $31. The big question with Facebook is whether it will have lasting financial success.
The best advice I can give anyone on investing is this, treat your investments like your business. Manage your investments like you would your business. With that said what is the best way to invest in IPO's? One with a long term buy and hold mentality. Look at an IPO to be your opportunity to get in on the ground floor of an amazing company. When faced with volatility, remember most stocks go up and down in value. What if you are long on an exceptional stock and the price drops? That is a great time to buy more and get more bang for your buck! Kick the Vegas style investing out the door. Go long on your investments like a quarterback throwing to the end zone, and you will most certainly score more touchdowns than the day trader hits the jack pot.
TSDavis75 has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and Google. Motley Fool newsletter services recommend Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.