When I was younger and hanging out with my friends at the weekend, we used to order chips and curry sauce all the time. For an extra 60p, they would deliver the food to your house. Last week, the food delivery company DoorDash had its IPO (initial public offering) with the company valued at $72 billion. It’s share price went from $102 to $190, an 86% increase in the first day.
Later in the week, Airbnb went public, with its shares going from $68 to $145, the share price over doubling in its first day and valuing the company at $100 billion. They were the 19th IPO of 2020 to double their share price on their opening day.
Add in Tesla growing by 824% in the last 12 months, there is a serious case of FOMO (fear of missing out) amongst investors. With companies such as Stripe, Robinhood and Roblex due to go public in 2021, it is likely that we will see more huge valuations next year and massive jumps in share prices too.
When a company is launched on the stock exchange, there is euphoria amongst investors. We usually see a surge in the stock price as more and more investors look for a piece of the action. Remember when Eircom was floated in 1999? They were floated at €3.90, reaching a price of €4.80, a 23% price increase.
This is why a lot of fund managers will not buy shares in a company during an IPO, as the share price is not a realistic price and it tends to be inflated by investors who have a fear of missing out. And we have seen with index funds, that you need to meet certain criteria to be included in an index.
If you haven’t sold your stock before close on the first day and taken your profit, you have to plan what to do with your stock then. Investing is a long term game, so are you going to hold your new stock over the long term? When the first days euphoria has worn off, there can be a hangover as the market takes over on settling the true price of the stock. This can be a very volatile period for the company as they find their right level. DoorDash for example is down 5% already, while Airbnb is up 13%. Are you going to stick with all the ups and down? What if you had bought Airbnb and sold on the first day, will there be seller’s remorse for missing out on those gains? Or if you bought DoorDash, will there be regret for not taking the quick profit? Will this be more FOMO?
If you are not an experienced investor, it is likely you are buying the stock based on a personal liking of the company’s product or from hearing someone talking about it. So how do you distinguish from which will turn out to be the next amazon from fitbit? Even Tesla bobbled around for years before suddenly taking off. There will be a countless number of investors who sold their position in Tesla as the share price wasn’t going anywhere and the company wasn’t making any profits.
Investors can be like gamblers. For all their big wins, there are lots of losses too, but they don’t talk about the losses too much. When someone tells you they bought Bitcoin when it was dirt cheap, you will probably find they also bought other cypto currencies that are now worthless.
Keeping your investments simple. Invest the bulk of your money in a diversified index of quality companies. These will provide you with steady growth over the years and will always be around. If you are going to dabble in IPO’s, put a small percentage of your investments into them, an amount that won’t cause a massive disruption to your future plans if it doesn’t go to plan. And don’t let FOMO cloud your judgement!
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21 December 2020