The best time to buy a company’s stock is when you can get in on the ground floor, at the initial public offering. Right?
Much of the time that idea can result in a big mistake. A research paper published this year looked at 1,611 initial public offerings from 2009 to 2019, measuring their return to investors over different time spans. They found that the offerings of smaller companies underperformed the market by 42.77% in the first year after the IPO, by 89.26% after two years and by 113.91% after three years. Larger companies underperformed by 14.59%, 27.74% and 25.57% one, two- and three-years post-IPO.
The lesson, of course, is that many companies go public before they are fully mature; getting in on the ground floor tends to mean that you may be buying (to stretch the analogy) an incomplete building that may or may not be built out the way you might have envisioned. This study may also tell us that companies tend to be overvalued, often because they have paid Wall Street brokers to sell those initial shares. It is often said that wirehouses try to inflate the value of the very IPOs its brokers are paid handsomely to sell.
This article was written by an independent writer for Brewster Financial Planning LLC and is not intended as individualized legal or investment advice.