IPOs for Beginners


You mean a site where people give their opinions about restaurants is worth billions? Sure, sounds good to me.

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“IPOs for beginners”. As a concept, that’s similar to “International Space Station repair for beginners.” No less an authority than Benjamin Graham, author of the definitive investing guide The Intelligent Investor and mentor of Warren Buffett, believed that initial public offerings were way beyond the neophyte investor’s level. He was largely right, but why?

Who wouldn’t want to be among the first to enjoy a promising new stock, one that no one else at the cocktail party had the privilege of investing in as early as you did? IPOs are tempting, if you’re the kind of person who loves shiny new toys and the general feeling of exclusivity that accompanies them. But at least you can physically show off your iPad 3 or PlayStation Vita and receive tangible oohs and aahs. That’s considerably different than telling everyone you meet that you hopped aboard the Groupon bandwagon when the rest of the world was still showing their IDs at the ticket counter. There’s little that’s conspicuous about a particular new entry in an online brokerage account.

Graham thought IPOs were only for seasoned investors for several reasons, one of them being that the previous private owners are often looking to cash out much of their holdings. The underwriters set the price of the typical IPO at a premium specifically to take advantage of a seller’s market. With limited supply, and highly publicized if not unlimited demand, what would you expect to happen to the price of a stock when it’s first offered to the public? (It’s a rhetorical question, and if you really need the answer, you shouldn’t even be considering investing in an IPO.)

Graham died a quarter-century before the original dot-com bust, and everything that’s happened since would only reinforce his position regarding who should invest in an IPO. Almost by definition, most initial public offerings are of companies that haven’t been around a long time. Lately, the companies haven’t even needed healthy records of revenue growth and profit, either. But with a proliferation of aggressive venture capital firms looking to back winners, and the financial media having ever more reach among amateurs looking for an exciting place to put their money, one thing is certain: the next Pets.com or eToys won’t be hurting for investors on its opening trading day.

Last November, Groupon “finally” went public after endless rumors. (“Finally” is in quotes because while most of Groupon’s existence as a private company was spent anticipating the IPO, that existence was only three years. The company was founded in November of 2008.) The company was on top of the collective consciousness as the hottest of all possible IPOs, at least until the day that Facebook goes public. Groupon acknowledged in SEC documents that it was on pace to lose half a billion dollars a year, and investors still kept coming. Once the institutional investors got paid, and GRPN finally became available to the ordinary public, the stock had fallen from its introductory price. A scant 4 months later, Groupon stock has lost almost a third of its value, which is fairly impressive seeing as earnings are about a negative dollar per share. Groupon’s never reached its IPO level after a couple of weeks of trading, and might never again.

Of course, all IPOs aren’t Groupon. VISA went public after decades of renown and profit, but even its IPO wasn’t available to anyone but institutional investors at the start. The same will go for Facebook. The company’s primary stockholders will profit the most – the very day it goes public, in fact. The initial lenders will get on their knees and thank the God of their parents’ choice. After a few more iterations, the most anticipated stock in recent history will trickle down to average investors at a price that could be a bargain, or could be a local maximum. There are more prudent ways to invest.

Take an example of a company whose stock is about as far removed from an IPO as possible – United Technologies. The Hartford-based aircraft engine and elevator conglomerate has been a component of the Dow since before World War II, and probably hasn’t been above the fold in any story in The Wall Street Journal since then. Most people have never heard of United Technologies, and the company brass prefers it that way, thank you very much. Nothing, not even a fire alarm, will clear out a room faster than telling people you recently went long on UTX stock. But an interesting thing about United Technologies’ performance is that you can examine its price movement over almost any arbitrary period,  and the graph will consistently move up and to the right.

Investing should have one solitary, overarching objective – to make money. Getting excited about an IPO for its own sake isn’t investing so much as it is flamboyance. The people who got in on Google’s ground floor, you can count on both hands. It’s tempting to think that you could have been one of them, or that you could be in a similar position when the next IPO comes available, but building wealth doesn’t have to be that capricious. Find an established, undervalued, temporarily wounded stock, and you’re far more likely to turn a long-term profit than someone starry-eyed over the latest company to be listed publicly.

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3 personal finance books that aren’t horrible

Don't cry. Your copy of Buffettology should be in there somewhere

The list itself is tiny, although this introduction isn’t. Most personal finance books are garbage.

Anything that includes worksheets, don’t buy. It’s a gimmick to increase the page count of a book, and besides, you’re never going to fill out the worksheets. No one does.

Ramit Sethi will tell you you’re an idiot. Dave Ramsey will patronize you. Suze Orman will draw you into an endless maelstrom of ancillary CDs, DVDs, sassy hair and pantsuits. The personal finance bloggers who hawk books – they know who they are – will do something even worse, which is repackage patently obvious information and call it a book. If you need to be told that you should spend less than you earn, build an emergency fund, and comparison shop before buying something expensive; and you couldn’t have determined that on your own, a reading list should be the last thing on your mind. Worry about food and shelter first, then move onto mastering fire and understanding the wheel.

Here are some personal finance books we don’t hate. Again, it’s a microscopic list.
The Intelligent Investor – Benjamin Graham with annotation by Jason Zweig

Benjamin Graham is the guy who taught Warren Buffett everything he knows. He wrote this guide to stock investing a long time ago, in a vernacular that can put you to sleep at times. Zweig, who writes for The Wall Street Journal, freshens the work up and contemporizes it.

The Wall Street Journal Complete Personal Finance Guidebook – Jeff Opdyke

It’s informative and comprehensive despite being short. Still, that didn’t stop Robert Rubin. The only downside is that Opdyke is the guy who writes that insufferable “Love & Money” weekend column that lots of local newspapers pick up for their business sections. Endless stories about what it’s like to have a wife and kids while holding down a job, something no one in the history of the world did before Opdyke. Fortunately, he mostly keeps this book free of such tedium.

Wow. That’s all we could think of? Apparently.

That just reinforces why we wrote Control Your Cash: Making Money Make Sense. It was the personal finance book we wanted to read, but no one had yet written it, so…

Get our book, and get it on Kindle. Buy a Kindle – the latest regulation-size one is $139 from Amazon and you can probably get a new one for less on eBay. You can take notes with the keyboard, and another labor-saving feature is that you can select memorable clips with the press of a button (they end up in their own easily accessible file.) Beats using a highlighter and hoping it doesn’t bleed over to the preceding or succeeding page. If you’re worrying about the formatting of Control Your Cash on a Kindle, don’t. The charts are easy to read and the footnotes line up just fine.

(The Kindle endorsement is moot if you don’t read, of course. But then again, you’re on a website that’s mostly text, and you’re on that website’s recommended reading list page.)

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**The Festival of Stocks Berkshire Hathaway 2010 Annual Letter Edition**