Friday, January 26, 2018

A Look Back At the IPO Decade

Facebook Share Price, from May 18, 2012 to present - a 489% gain.

DJIA, from May 18, 2012 to present a 216% gain.

The last decade or so has been an interesting time in America. It seems that in the last few years, more than ever, we have been continually grasping for success. One after another, things were presented the average American as a means of getting rich very quickly and with little or no effort. We were exhorted to buy houses or gold or Bitcoin or stocks.

And each time, we were told this was a sure thing that would make us rich.  And each time, after an initial period of success, it all came falling apart. And each time, we went right back to the well, convinced that this time, for sure, we would make it big - unlike the last three or four times where we were suckered into investing in something we didn't really understand.

And one of these things over the last decade was the Initial Public Offering or IPO - when stocks are first sold to the public.  I think many young people today think that IPOs are regular part of the financial landscape.  But when I was a youth, we never heard about such things.  The number of new companies starting up in America was very small, the average citizen didn't invest in start-up companies. We all bought Blue Chip stocks if we bought stocks at all, because most of us had pension plans in our old age.  The IPO, as we know it today, basically didn't exist 20 or 30 years ago.

IPOs were touted as "The Next Big Thing!" and the chance for Joe Littleguy to get in "on the ground floor of the next Microsoft!"   But was it?   Or was it really just, at best, an average deal, and at worst, throwing your money away?  It has been a while and the dust has settled on many of these IPOs, and we can tell now in retrospect which were winners and which were losers - something we could not tell back in the day.

And let's just stop for a moment and remember that we don't own time machines nor do we have crystal balls to see into the future.   Sure, in retrospect, we can say that one stock was a winner and another was a loser - and that if you selected the winner you'd win.   This is idiotic.   It is like going to the race track the day after the races and then "spotting the winner" from yesterday's race.  I can also tell you the winning lottery numbers - from last night's drawing.

My take on these speculative deals is this: Since we can't afford to gamble, it is best to walk away from all of them, rather than bet "just a little bit" on some of them.  Because just like the racetrack, yes, someone always wins and it could be you.  But the majority of people who play the ponies, lose.  And that is far more likely to be you.  Quantum investing is looking at the overall odds, and not taking wild bets on long-shots - even if some of them will win.

And the winner here, in the IPO race, is Facebook.   And I was skeptical of the Facebook IPO and still am skeptical of the long-term staying power of that website.   Why?  Because we've seen similar things that looked pretty damn permanent that turned out to be ether.  And the granddaddy of them all was AOL - a website and ISP that became so wildly overvalued that they bought Time-Warner, which was a real company making real profits.  Years later, Time-Warner managed to extricate itself from the deal.  AOL still exists, but really isn't much to write home about.  And the Internet is littered with the carcasses of formerly "hot" websites that went to "Not".

Now maybe Facebook will escape this fate.  Maybe, like Google (and its panoply of related sites) it will have long-term staying power.   Or maybe Google will screw the pooch.  It is hard to say - we use sites and software and then one day switch and forget about the old sites.   Surfing MySpace on Netscape Navigator was once "a thing" and just as suddenly wasn't.   Again, we can't predict the future.  Maybe this "fake news" Russian Troll business could kill off Facebook - or worse, Facebook's attempts to filter out viral media, fake news, and rumors will backfire.   It seems to me that the very things they are trying to get rid of is what Facebookers like the most!

As the above chart shows, Facebook has done well - but in part because people are overpaying for it.  It's P/E ratio isn't staggeringly high - just about double of where it should be for a profit-making company.  And not surprisingly, its stock price is about double what the DJIA did in the same time period.  So if you bought the Facebook IPO stock, and hung on during the initial crash, you did pretty well.  Well, provided you sold it sometime - as you never have received a dividend from your investment.   Your gains are all on paper, so far.

And that is one reason why, when a stock goes up in value to double what I paid for it, I sell half of it. That way, I am assured I at least made my money back.   Rapid rises make me nervous, so I tend to sell when I see them.   A reader chides me for being so conservative - but this is my life and livelihood we are talking about, not Monopoly money.   If the stock goes up still, I make more.  If it crashes down to nothing, I don't have to eat cat food.   It is nice to think about all the profit you could have made, but money you did make is more tangible.

Tesla is another "winner" IPO, starting at $19 a share and trading today for about $350.  But the company has yet to make dollar one, and is hemorrhaging cash.  If they can't push those Model-3's out the door pretty quickly (before depositors change their minds) it could all come crashing down in short order.  The rapid-fire new product announcements, as well as the taking of deposits on vehicles that don't yet exist, remind me too much of the Elio fiasco.

Don't get me wrong, I want to see Elon Musk succeed, even if he looks a bit like a creepy Bond villain.   A world with electric cars charged by solar shingles and rockets to the moon sounds like a wonderful fantasy.  Well, the rockets are at least doing well, although Space-X, as a private company, doesn't have to report financials, so we don't know if they are stealing launches away from Boeing by selling for below cost or not (given Musk's business model, I suspect that is the case).   Let's hope he doesn't run out of money before he starts to turn a profit.

But as an investment?  For my retirement?  To support me in comfort for the rest of my life?  Uh, no thanks, way too risky.  I will leave this to the private equity people and Billionaires to bite on.   They can afford to lose Billions, I can't even afford to lose a hundred bucks.

But what about the other IPOs?  It is hard to find data that isn't cheerleading for tech IPOs.  Even this "geek" review of 100 IPOs is startlingly positive.   They claim that 2/3rds of IPO stocks are selling for more than their IPO price.  This sounds great, but selling for a penny more after five years isn't making money, it's losing it.  I would be interested to see how many of these stocks did better than the DJIA or the NASDAQ or even Grandma's Christmas Club account at the Credit Union over the same time period.  I suspect the percentage would be less than 2/3.   You have to have something to compare these things to, and the fact that the "geek" people don't tell us this is, in itself, telling.

They do admit, however, that a lot of these IPOs were real stinkers.  What is interesting to me, however, is that of both the "winners" and "losers" they profile, most are for companies I never heard of.   Yea, I heard all about Tesla and Groupon.  The others?   Didn't make it to the financial channels.  The hyped IPOs, like Snapchat IPO, haven't done so well.  And it is interesting that if you google "top 10 IPOs" or whatever, most of the articles are talking about previous IPOs in relation to Snapchat.   Snapchat has lost about half its value since the IPO, is losing money and subscribers, and appears to be overtaken by Facebook's own applications.

That is the problem for a lot of this so-called "tech" - anyone can copy it, as most of its has no Intellectual Property to protect it (and keeping others out of the market with IP is damn hard to do!).  And the barriers to entry are often pretty low - and the big-pocket competitors, if you don't sell out to them at the get-go, will just copy your business model and take every last penny you have.

Which brings us to Groupon.  Groupon is now trading for about five bucks a share, down from a high of about twenty.  The idea was not protectable.  The founders could have sold out early on for a lot of money and decided not to do so.  It was a fad that wore off as consumers got bored with it and retailers got frustrated with it. And the big players created their own knock-off "me too" coupon deals, diluting the market and basically killing it off.

But at the time the IPO came out?   Well, it was the cat's ass - and if you were skeptical about it, you were shouted down in financial discussion groups.

And yes, a few got rich on these IPOs, but most of those were the insiders who founded the company or were pre-IPO early investors.   The majority of people who bought IPO sticks either broke even or lost money.  There was no "Next Big Thing!" for them - at best a thing.

But Bob!  How can you get rich if you don't take wild risks?   That is the conundrum,  ain't it?   And the  answer is, you might not get wildly rich by merely investing for the long haul, but you won't go broke, either.  And we can't afford to go broke. 

Again, quantum investing.  What is most likely to happen to you if you consistently seek out long-shot deals?  The odds are stacked against you.  Odds are, you lose, big time.

But what about gambling "just a little bit? "  People tell me they can afford to lose a few hundred or a few thousand dollars on some risky investment that might pay off.  Gamblers tell me the same thing

But over time you realize that you wished you saved that money instead.  Even small amounts of money invested over time add up.  And it is sad that young people in particular get caught up in these get-rich-quick schemes, as they could really clean up on compound interest over timeThe bulk of my wealth did not come from long-shot investments or getting lucky on specific stocks, but from investing consistently over 30 years and re-investing the profits from those investments.  Compound interest is a bitch - when you're paying it.  It's a beaut - when you're earning it.   And if you are young, time is on your side.

The other problem with gambling is that it leads to more gambling.  One you are hooked on deals like this,  it is hard to quit.   They let you win just enough to keep you in the game - enough to think that you might gamble your way out of trouble.  And when you lose?   Many folks double-down on their bets, and take the next wild risk to come along, hoping that "this time" it pays out and makes up for their previous losses.

And a lot of people today are doing just that - after jumping on gold at the peak, and losing money, are jumping on Bitcoin at the peak and losing money.   And this is after they lose money on IPOs, real estate, and, well, just about everything they touched.   It isn't bad luck - it's bad investing.