Heres a Twitter reality check 11:58 AM ET 11/8/13 | Marketwatch So you missed out on the Twitter initial public offering. Good for you. Oh, you dont get to count your first-day profits and tell your friends that you hit some financial jackpot, but truthfully you shouldnt believe any average investor who tells you they made a killing on the stock without having trading confirmations and account statements as proof. The initial public offering process is built and managed to produce a sure-fire pop on opening day, which results in an equally foreseen fallback later, and the biggest initial public offering since Facebook FB) was predictably set up to succeed even if the broad stock market tanked, as it did when Twitter TWTR) debuted on Thursday. Moreover, popular IPOs are virtually guaranteed to throw average investors off their game. If youre a day-trader or a momentum player and you want to jump into the pool with the sharks who circle at initial public offerings, knock yourself out. But if youre an average investor, you need to remember that the more buzz a new offering creates on Wall Street, the more individual investors get interested and excited, making it easier for the guys behind the deal to make a killing, and that if you jump into the midst of that, youre likely to be part of their slaughter. Forget for a moment that the average investor should believe that IPO stands for Its probably overpriced. Instead, focus on how while a big spike in price today might bring a smile to your face, the real goal is to have that spike show up over time. The IPO is to a companys big picture what the first 100 yards is to a marathon. You cant win the race in the first few steps, but you can lose it, with the wrong pacing or getting injured during the hard start. For everyone who points to other famous IPO pops and big-day openings as a reason to want to play initial-public offerings, they forget the truth in the numbers. If you waited three months to buy Google GOOG) when it went public, for example, you were in roughly at the same price as when it first traded. Thats not where it closed on the first day -- after the IPO pop -- but where it started, at the price the average guy could not get on the first day. While some people can gloat today about how their opening day investment in Facebook ultimately has paid off, it took them a good long time to get that satisfaction, and the number of investors who bailed out in pain over the stocks initial flop appears far greater than those who stuck it out. ALSO SEE: 5 of the most profitable tweets ever The rising market has foolishly made a lot of investors figure that every story is going to play out the Facebook way. LinkedIn LNKD) , GrouponGRPN) and some of the other recent hot new issues all had their own version of the post-launch stumble, but have since ridden enthusiasm and a momentum-driven market to record highs. That has people thinking, again, that such action on an IPO is normal, which makes them that much more desirable. The pain of the Facebook opening debacle has been swept under the rug and forgotten, replaced again by the thinking that sooner or later an IPO becomes a cant-lose proposition. In the mid-1980s, one of the first IPOs to capture public attention was for Home Shopping Network, largely because it made the companys founders billionaires in a day; within weeks, they were on the Forbes list of the richest people in America, instant wealth that was unheard of at the time. In those days -- back in an era before you could click at the bottom of a news story online to make predictions over where a stock would go in the next day, week or month -- I worked at the St. Petersburg Times, the local paper covering the Home Shopping deal. The business reporters made a friendly wager on just where the stock would go from the surprising pop of the IPO; the winning bet (mine, by the way) was that the stock would go back to where it was first priced, then drop and only start to be fairly valued based on its fundamentals months down the road. Thats how it has always been, and likely always will be; stocks start out trading on hype, then ride the wave of their industry and the tide of the market, but ultimately end up being traded on fundamental values. I point this out because I was asked this week by a wide range of people who wanted to know if they should buy Twitter as close as possible to the IPO. Whether it was the supermarket clerk, the executive at the gym, the regular listener to my show (MoneyLifeShow) or the random reader who called the office -- and they were just a representative sample of a pretty diverse group -- my response was always to ask why they would want to make the investment. Well, said the executive, its Twitter. You know, he added, making his hands open wide as if he was holding an oversized pumpkin and adding emphasis to his voice, Twitter. Whenever you get asked why an investment idea should turn out, if your answer is because it should, youre basing the investment decision on twaddle and horsefeathers. That doesnt mean it is guaranteed to lose money, but think about how many brand names someone could justify buying on that same basis. You could buy Apple AAPL) because its Apple, McDonalds MCD) because its McDonalds and Walt Disney Co. DIS) because its Disney, but most people dont. Because those businesses are mature, savvy investors dont just rely on name and hype. And theres a reasonable bet in the idea that established names and their proven fundamentals will do a far sight better than Twitter over the next decade. Over time, a company needs more than hype to become a good stock. Maybe Twitter someday achieves that status, but for now the wishful thinkers and the if-only buyers who missed Thursdays start only prove that buildup, promotion and wishful thinking sometimes outweigh common sense in the market.
Posted on: Fri, 08 Nov 2013 18:12:20 +0000
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