stocks in general and about the way people invest is usually not a good way to go however it’s a very sad story and if it saves one person from potentially having this happen to them then you know it was worth time to share it. So I’ll share the story and then i will talk a little bit about ipos and why I definitely think you shouldn’t buy stocks that are just ipo’d and we’ll talk about some alternatives to buying ipo stocks.
So the story had this emailed to me quote had a client come in who owned a small business he used to own a pizza joint and did really well but a few years ago a friend who is an investment broker told him about a hot stock tip he convinced his friend that gopro was going to go through the roof and he should get in it now this was right before their ipo my customer then walked into the bank and got a 100000 business line of credit.
A few weeks later he then proceeded to draw the cash out and put it all into the ipo as you know it skyrocketed for a while but more recently the last year or so it was crashed to less than twelve dollars a share and he was wiped out he still owes the bank a hundred thousand dollars and he lost the business because he couldn’t afford the loan payments and his wife left him because of his poor decisions which he didn’t consult her with about poor guy but a great example of investing without doing your research and following a hot stock tip really really sad.
Basically ipo for those of you who aren’t aware it’s it’s stands for initial public offering it’s when a company goes public it’s when they allow themselves to be traded on wall street basically you know these owners have built up this company and they want to sell part ownership of it in exchange for getting a huge payout essentially kind of selling off the business and it becomes owned by the public rather than by a person that’s the public corporations we kind of all think and know about a lot of times there’s a lot of excitement and a lot of people who think as investors if they get in on this next best thing that they will be able to make a lot of money with these types of stocks.
While a lot of stocks that are young do eventually become bigger and greater there’s so many more that don’t and so there’s a lot of material and investing books where it’s shown that many more ipos go bust than do become the next google or facebook investing ipos is very very risky the alternative and and the way i invest is by actually buying businesses with reliable cash streams businesses that have track records of being able to be very successful having successful business models and buying them at great prices not buying them when everybody else is buying them and they’re so expensive that it’s going to be such a small possibility that you make money.
In fact, you’ll probably lose a lot of money but you know actually buying businesses at reasonable prices that have reliable cash flows they might not be growing as fast as some of these ipo stocks that kind of shoot out of the gate but it’s been proven time and time again with value investing and we’ve seen it over and over again through history that those are the type of stocks that that tend to outperform the market the ipos tend to really really be bad.
If anything it’s been shown that the only people who win in the ipos are the underwriters the middlemen look at the guys who are essentially putting this deal through and then obviously also the guys who own the business who may have been slaving at it for years and years and they can finally cash out this example with gopro and this guy who really lost a lot from this poor decision really is not a good representation of how the stock market works in general and there are ways that you can make smart decisions you don’t have to you know lose your business and lose your wife just because you want to buy some stocks and make some money but you do have to be smart you do have to look for the right resources that will point you in the right direction and show you how to invest in businesses with reliable cash streams it might be boring but but reliable is good.
Thank you so much for read this.