Should You Invest in an IPO? Start With a Plan, Not FOMO

Hello,

You may have heard Elon Musk's SpaceX is going public via an Initial Public Offering (IPO). An IPO is when a company changes from a privately held company to a publicly held company. This allows the public to purchase that company's stock.

Is it a good idea to invest in a stock that IPOs?

Below is a sampling of some of the largest and most high profile IPOs from 2019 - 2025. It shows the returns of the IPOs in dark blue compared to the S&P 500 (a diversified index) in light blue 12 months after the company IPO'd.

Some other notable IPOs that experienced drawdowns post IPO: Amazon: - 91% 42 months post IPO Nvidia: - 89% 24 months post IPO Facebook: -61% 4 months post IPO Tesla: -37.5% 1 month post IPO

Coinbase: IPO'd in 2021 at $381 per share Dropped 40% to $228 after 1 month Increased to $337 after 6 months Decreased 87% to $49 after a little over 1 year Decreased 91% to $33 after nearly 2 years Currently priced at $163 per share after about 5 years of their IPO, an overall decrease of 57%.

As you can se IPOs are highly volatile and investors often rush to get in on fear of missing out, only to be burned, then panic sell at a loss.

Reminder: An equally matched increase from a drawdown does not get you back to even. For example, a 50% drawdown needs a 100% return to get back to even. A 90% drawdown, needs a 900% return to get back to even.

Focusing on the Bigger Picture

I hear this quite a bit with "If I had just invested in X Stock, look at how much money I would have." I think sometimes we go into investments, without any sort of plan in place on the outcomes. We tend to think of a positive outcome: "I can make a lot of money quickly" then even if you do, what is your plan? Investments should always follow a plan.

Let's do a thought exercise on pulling off a successful IPO or apply this to any speculative investment.

1.) How much money are you going to invest in a single stock? 2.) If successful, at what point do you sell the stock? 3.) If unsuccessful, at what point do you sell the stock? 4.) If successful, what do you plan to do with the money you make. Does it change your life in any meaningful way?

Unless you are willing to risk significant amounts of money, there is a small percentage chance investing in a single stock has any meaningful difference in your everyday life.

And even if you did risk a lot of money and it was successful, your bragging rights would be what? "I was incredibly reckless and got extremely lucky." Where is the gratification in that?

Fear of Missing Out

Now, I may look back on this article 10 years from now and look like a fool if SpaceX is 100x higher than their IPO. That being said, here is why that doesn't bother me:

1. To dispel the fear of missing out right away, SpaceX is going to end up in the S&P500 index. I and every single one of our clients will own SpaceX through holding a US based index fund. 2. As mentioned above, I am not going to put any meaningful amount of money into a single stock where it would change my life 3. Even if it did, what then? Retire early? Then what? 4. The stress of being in a single stock is not worth it to me. I have been down this road before and every morning when the market opens and every afternoon when it closes you are checking the price. I don't care to live that way. 5. I have enough. I am on a plan to be financially independent on a day I am content with and I can enjoy life with what I have leftover.