This cartoon pretty much explains my attitude towards IPOs. IPOs are almost always bad investments. You are often sold a distant dream at an expensive price. A lot of things has to go right for a new company to succeed. They usually need the money to grow and to take risks and they might need more money down the road. It sounds like with all the new red hot IPOs bursting out of the gate that it’s so easy to get rich. But instead the reality is that most IPOs makes investors poorer. Some IPOs are very interesting companies (e.g. Shake Shack, Fitbit, David’s Tea) and could reward investors in the future but you are paying a lot of money for that risk. Finding the gem is not easy and even if you find it can you get a fair price? IPOs are a good deal for the founders and the insiders who are looking for an exit.
Warren Buffett has a great quote on IPOs:
“It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less knowledgeable buyer (investors).”