Think Twice Before Buying an IPO

Transcript

Ken Fisher:

So, in 1987, in my book that year, The Wall Street Waltz, I coined the phrase, "IPO means it's probably overpriced." Now, people think of IPOs as Initial Public Offerings, and there's always a lot of excitement about some of them. But IPO, in my mind, means it's probably overpriced.

Why do I say that? Well, you could look at it in two ways. One, just a history, which is that the history is that IPOs with a little bit of time tend to be money losers. IPOs have a very long history. There have been a lot of them in history, you can aggregate them. And when you look at them one, three and five years later, while there's some that become spectacular winners, on balance they tend to be money losers. They tend to be market laggards. This is not a place that's kind of like Las Vegas set up with the odds in your favor. They're set up with the odds in the house's favor.

Why? That's the second part. Because none of these companies have to go public if they don't really want to, particularly not in a world that we have like today with so much private equity, looking for places to put the money. Therefore, when they go public, it means that the pricing was favorable to them, not to you. What are they doing? They're selling stock of newly created shares to raise capital. And so, the better the pricing is for them, meaning higher with a higher valuation relative to other financing alternatives the worse the relative option is for you who buys. Hence, it's probably overpriced.

The fact of the matter is, some in history have, of course, been spectacular winners. If you just think of all of those stocks, which are our biggest stocks today that weren't 25 years ago, well, they all went public at some point in time, and over 25 years they became big winners. And this would include things like Microsoft and Amazon and Google, et cetera, et cetera. And in retrospect, it's easy for somebody to say, "Oh, anybody could have told that Google would be a big success." But in reality, if you think through how many of these things have gone public at the time, that's never so easy to see. So many have also been big failures. We tend to forget those.

Now, the other thing that I would say is, IPOs, en masse, going back to my prior point, when the pricing's favorable to them, they tend to come out en masse late in a bull market. I often cannot resist citing John Templeton's line that bull markets are born on pessimism, grow on skepticism, mature on optimism and die in euphoria. And in the euphoric phase, you get a lot of IPOs and they all have wonderful stories. I don't want to pick on any one of them, but right now we have a universe, as we're looking into the back part of 2026 and 2027, of so-called "mega IPOs." Not IPOs that are raising hundreds of millions of dollars with a market cap of $10, $15, $20 billion dollars. But companies that are raising much, much, much more money with market caps that will soon be broaching $1 trillion as IPOs, things like SpaceX.

Now, there's a whole slew of them lined up. It's a little bit like airplanes lined up to take off on a runway. And the reality is, if the going gets good enough on that runway, you'll see two, three trying to take off at the same time. Jostling for center space on the runway and the other guys just trying to accelerate with their jet engines going off the side. And things get bumpy then. But, going back to my prior point, that's also a sign of euphoria. And euphoria goes on for a good period of time toward the end of a bull market. It's got a momentum unto itself. But it contributes to the point that the IPO is probably overpriced.

So, I've kind of given you my taste of that and urge you in this period ahead to be very cautious if you think about buying IPOs, because I will tell you that eight out of ten of them will be doing badly. Terribly? Maybe not. Badly? Yes. Is it a place where you— now, mind you, you can get a run where for three months there's a hot streak, and most of them just go up. But that's a timing / luck feature and not something that you can rationally predict. And, if I were you, I wouldn't try to do this game.

So, thank you for listening. I hope this was useful for you. I look forward to the next time I talk to you. Take care.

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