Tuesday, November 08, 2011

More On Evil IPOs

Just to follow up on my previous post on Evil IPOs.

Essentially, IPOs are, aptly described in this article, uber expensive lottery tickets:
Initial public offerings get a lot of coverage, and why not? Everyone loves the idea of taking hard-earned money and using it to gamble in the hope that they’ll end up owning the next Amazon or Google and not Pets.com or Demand Media. What often gets lost when we get all excited about a hot new I.P.O. is the pesky fact that most of the time buying an I.P.O. is a great way to lose money.
I remember standing in a long line in 2006 for an open house for a new Toll Brothers community being built in Las Vegas. The person in front of me and the one behind me were both real estate agents on the phone with what I assume were clients, imploring them to get down there right now because this “deal was HOT!” Hot is not a word that you should use when you’re considering investing your hard-earned money. Can you imagine Warren Buffett and Charlie Munger getting all “hot” about their next deal? In fact, I can think of nothing “hot” about investing correctly. 
Of course, there are I.P.O.’s that do well. Think of all the money you would have made if you had just invested in Amazon or Google at the I.P.O. price. Those instances seem to happen frequently enough for us to ignore the fact that the odds are against us. Sounds a bit like the lottery. 
Normally when you invest money, you actually need it for rather important things like sending your children to college. So you do at least a little research. I.P.O.’s in general are hard to research, and Groupon has been no exception. You have the chief executive, Andrew Mason, saying things like, “With a market measured not in billions but in trillions of dollars, we’re just getting started.” And on the other hand, you have a new company in an industry it almost invented, with no profits. 
Sounds like a tossup to me. 
There is nothing wrong with using money to gamble on a tossup. Who knows, you may be right. Just do everyone a favor and stop pretending that it’s an investment. It’s a lottery.

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