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Home > Market Trends > Market Health > The No. 1 Mistake Investors Are Making
Now

Market Health


THE NO. 1 MISTAKE INVESTORS ARE MAKING NOW

Matthew Carr | April 12, 2022

The markets are constantly evolving.

So we are frequently introduced to not only new assets, like exchange-traded
funds and cryptocurrencies, but also entire new worlds of exciting investment
opportunities.

In fact, over the past few years, we’ve seen a boom in one sector of the market.

And if tapped correctly, it has the power to mint fortunes.

But investors who act rashly and dive in headfirst without doing their homework
are almost guaranteed to lose their shirts.

The Overlooked IPO Catalyst

A piece of the 2012 Jumpstart Our Business Startups (JOBS) Act created an
on-ramp for small companies looking to go public.

The JOBS Act loosened regulations on what are known as “emerging growth
companies” (EGCs), as defined by Section 2(a)(19) of the Securities Act.

And this has set off a firestorm of activity in recent years.

Last year, new companies entered the market at a record pace.



Nearly 1,000 companies went public.

That was the most debuts since 2000, and it broke the record for annual initial
public offerings (IPOs) that was set in 1996.

And 2021 saw more than twice as many IPOs as 2020.

But here’s the deal… Just because something’s new doesn’t mean it’s a surefire
winner. That’s a mistake too many investors make.

When a company goes public, everyone races to grab their piece.

These are the hot new commodities on the market – the most innovative and
exciting firms. And many investors believe there is a promise of substantial
share price gains.

But that’s a fallacy.

It’s one few talk about on Wall Street… at least one they don’t share with
everyday investors.

The reality is, anyone who invests on an IPO’s first day – I call these people
“day one investors” – is guaranteed to lose money in the short term in our
modern market.

Day One Dummies

During the glory days of the 1980s and 1990s, IPOs minted millionaires easily
enough.

And the worst part was that investors didn’t even need to be selective. Throwing
a dart at a board often resulted in positive returns.

But in a roaring bull market like we saw in those days, everyone is a genius…
until they’re not.

In fact, from 1990 to 1999, the average six-month return of a new IPO was 12.9%.
That was almost double the return of those companies’ peers during the same
stretch.

And it was 3.5 times better than the average return of IPOs in their first six
months in the 1980s.

Investors would have been foolish not to race in and snag a piece of every debut
that they could.

And there were true gems, like eBay (Nasdaq: EBAY), which rose more than 1,200%
in its first six months!



But over the past two decades, the story has changed dramatically.

This has happened in part because of the loosening of regulations on EGCs. But
the push to get new startups to market doesn’t mean they are as financially
solid as those of the past.

Today, the average return in the first six months after an IPO is -1.9%.

This is not only a massive step down from the hot-stove returns of the 1980s and
1990s but also a considerable underperformance relative to those companies’
peers – they’re lagging behind by 6.2%!

And as we dig further into the data, the harsh realities get even clearer.

An Anniversary of Regret

We’ve all seen the headlines about the massive first-day returns of IPOs. The
mainstream financial media reports on these breathlessly, helping whip investors
into a frenzy.

But here’s a sobering stat: Six months after going public, more than 50% of
companies underperform the market.

And most of them underperform by 10% or more!



At the one-year anniversary of going public, a truly significant disparity in
performance emerges.

More than half of new companies underperform the market by 10% or more.

Meanwhile, a much smaller portion outperform the market by more than 10%.

And as time goes on, these become tales of two very different cities in terms of
performance. The divergence between the underperformers and the outperformers
grows even wider.



That means investing in IPOs with a “shotgun approach” doesn’t work like it used
to. Successful IPO investing requires being quite selective, and it requires a
strategy to separate the wheat from the chaff.

In the coming weeks, I’ll break down how investors can do precisely that. It
boils down to a handful of critical criteria.

Investing in recent debuts can be very profitable – life-changing even – if an
investor takes the right approach and knows how to avoid the duds. Patience, due
diligence and knowing what catalysts to look for are all part of the code to
unlocking post-IPO fortunes.

Unfortunately, day one investors often end up victims. They buy into the hype
and the public relations campaign leading to up an IPO, and seeing those
first-day returns triggers a greed reflex… a true FOMO moment. And their
financial independence can suffer from it.

Don’t be a day one dummy.

Here’s to high returns,

Matthew




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