Don’t Get Swept Up in IPO Madness

A variety of well known companies—including Levi Strauss, Uber and Lyft—have plans to go public this year. But if you’re looking to add a few “unicorns” to your portfolio, you should pump the brakes for the time being.

“In today’s market, chances are that buying in on a newly public stock could be a losing proposition,” writes Lorie Konish for CNBC. That’s for a variety of reasons.

One such, for unicorns like Uber and Lyft that have massive valuations and have raised tens of billions in funding, is that they just won’t be much of a deal right away, unless you were already invested. If you’re trying to buy in when they go public, well, there isn’t necessarily a ton of value for you.

Another reason to hold off, as CNBC notes and I’ve covered in the past, is that the beginning is typically rocky:

Think back to Facebook’s IPO in May 2012. The company went to market at a high price and investors suffered losses at the outset.

It took about a year for Facebook’s stock to get back to its opening price. Today, the stock’s performance would be considered a success — as long as you held on.

Investors could get spooked and back out. It’s better to wait it out a bit and be sure. As I wrote when Spotify went public:

Sit on the sidelines and let the big time investors set the market, and then buy in small blocks in a few weeks when things have settled down. “[Going public] can be pretty risky because generally institutions are going to start paying attention,” he says. “Wait a few weeks, and then start following. The first day will be a very volatile day.”

In the meantime, do your homework on the companies you’re interested in. As I wrote, consider: “how does it make money? What’s its long-term plan to continue to make money? What are alternatives that are eating into its market?”

And remember that you can likely get exposure to these hot companies by investing in mutual funds. Just without the risk of putting all of your eggs in one basket.

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