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DM 35 - Should You Invest In An IPO

Updated: Sep 25, 2022

Oh hi, it’s Jon. Welcome again to today’s Didactic Minute. Today we’re going to talk about this week’s hot topic which is initial public offerings or IPO’s. What does that mean? A lot of you guys have been on Robinhood and have checked out this new system they’ve got where Robinhood investors and the little guy can get into IPOs and get into investing in these stocks as soon as they start up. So as soon as a company goes public, gets on the stock exchange and first gets their “ticker symbol” – okay, so Snapchat case in point was snap S-N-A-P was their ticker symbol – you could get in back when Facebook opened up or any of these companies from the last 150 years all had an initial public offering.

Now, is this a good idea? Is this something you, as a young physician, should be getting into? I’m going to go ahead and say no, probably not, and here’s why. If you look at a lot of the history between when these IPOs happened and where the stocks are at today, we can probably replace initial public offering with the more apt acronym of IPO – It’s Probably Overpriced.

Okay, so what’s happening is when a company goes public, the reason they’re doing that is they want more money and they want a lot of it and they want to be valued highly. So the stock price is determined by how is the company valued. They take that number, let’s say, it’s a billion dollars. They determine how many shares they want outstanding, let’s say, it’s a million shares. Then if that’s the case then every share will be a thousand dollars. So let’s say they put out 100 million shares then a share price will be 10 dollars that gets into the valuation of a billion dollars. But what’s really happening is in that moment they’re looking for funding and a lot of the original investors, the founders, are wanting to get some of their initial investment back at a very good price – to them, not to you. So keep that in mind as you’re looking at getting into an IPO…that this is a situation that is favorable to the seller, not the buyer which is probably the case. Are there some deals out there? Probably, but you and me as the little guy are not going to find it. The deals have already been had by the people with the money, the large institutions, that got in much earlier on and often people had access to lower share prices by the time you have the chance to buy it at a higher price. So if you want to get into it, find out for yourself.

Fine, you heard it here first. IPOs are typically not shown to be a great investment long term. Now, as we’ve said before, wealth comes from small boring consistent decisions made over a long period of time and a broadly diversified, fairly equity heavy index funds, and the traditional stocks and mutual funds are going to get you to your goals if you follow your plan. So hope that helped. Hoped that it wasn’t too discouraging but I want to give you guys the truth on what an IPO is and should you get into it. Again, this is Jon with today’s Didactic Minute. We’ll see you next time.

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