One of the most difficult areas of investment is one of growing
prominence in 2011 - initial public offerings - otherwise known as
LinkedIn (NYSE: LNKD)
and social media behemoth
are just a few of the IPOs for 2011.
While I love the idea of new companies coming to market - vastly
expanding our universe of profitable opportunities - I still remain
skeptical of the average investor leaping into IPOs.
Don't get me wrong - I am definitely a believer in IPOs. Without
Microsoft (Nasdaq: MSFT)
Google (Nasdaq: GOOG)
Apple (Nasdaq: AAPL)
, and thousands of other blue chip companies would not be the tech
giants they are today. IPOs are the very foundation of our
But the hypester promoters - and the gullible investing public -
gave IPOs a black eye in the late 90's, early 2000's - and with
some of the new and recent IPOs coming downstream, it looks like
they have not completely disappeared.
, for example. The Chinese social networking company has never been
profitable. Yet its 2011 IPO was hyped to the gills, raising $743
million, with the shares debuting at $19.50. Currently, those same
shares are trading at roughly $7.50.
This is a perfect example of when the buyer should beware. As
the IPO market heats up, investors will have to be very careful in
avoiding buying shares in those companies that have no business
selling stock to the public - businesses with no profits and
esoteric products that I couldn't explain to my smartest friends,
let alone my grandparents.
Let me back up a minute and tell you what IPOs are supposed to
be and do.
Successful entrepreneurs often find that the needs of their
businesses have outgrown their personal financial assets.
Consequently, if they want to remain competitive in their industry,
they must expand. Or they die. Therefore, the number one driving
force behind IPOs actually is to raise capital to expand a
Yep, that's right. The stock market was and is meant to be an
exchange of cash for stock, with a long-range plan. Investors turn
their hard-earned cash over to well-run businesses who want to
grow. In return, investors hope to get their money back, plus a
profit - over a period of time. Not overnight.
Unfortunately, it's not only novice and greedy investors who may
be taken aback by that statement. Why? Because Wall Street has
conned unwitting investors, millions of decent people, into buying
into their theory that IPOs are a get-rich-quick-scheme - for the
They couldn't be more wrong. Except, of course, that for Wall
Street execs, their largest clients and even some politicians, it
does usually work out that way. But for everyday people - the bulk
of investors in this country - the story is not quite so sweet. In
fact, I can count on one hand the number of individual investors
that I personally know who have made a killing in the IPO market.
And just a few more were actually able to get their hands on IPO
stock at the offering. And I bet you can say the same thing.
So, forget about easy money. Instead, think about investing in
companies that make a real product, that have the potential to grow
their businesses with double-digit returns - in the foreseeable
And forget about getting into an IPO when the company first
becomes publicly-traded. Unless you are a well-heeled big brokerage
client, or someone with political connections, the only IPOs you
are going to be invited to buy will be dogs. Take my word for
But that's not to say that you can't profit from IPOs. Just let
the companies go public, and then bide your time. Be selective,
look at the numbers, and see if their product makes sense. After
the first couple of public quarterly reports, take a close look at
the companies, evaluate them from the standpoint of how well they
will fit into your personal investing strategy and portfolio, and
then buy the ones that look to have favorable, long-term