Should Individual Investors Buy an I.P.O.?

Twitter has an initial public offering (I.P.O.) for 70 million shares coming in a couple of days and has confidently upped the price range by about 30 percent in the last week. The new price range ($23-$25) will give Twitter around $1.7 billion to finance its growth.

These high profile I.P.O.’s beg the question: Should individual investors buy into an I.P.O.?

According to research from Fidelity Investments, the number of I.P.O.’s so far this year is up 40 percent from the same point last year, and the dollar values of those offerings has increased 10 percent. Sounds like a good deal for investors on the surface, but think back to the last high profile tech I.P.O., Facebook’s I.P.O. was a disastrous stock debut.

Twitter is the type of I.P.O. that creates all kinds of media attention which might entice people to try to buy the stock without doing enough (or any) research. The more of a household name a brand is the higher the probability it will attract a greater number of investors but excitement for a brand and financial success are uncorrelated.

I.P.O.’s don’t just rise in value as they did in the late 1990’s. There are many more flameouts than winners in this market, but most people don’t remember the losers, it’s not wired into our optimistic DNA. (Which is another reason to use a professional advisor, we are like Missourians in that we tend to say, “Show me.”)

For instance, information on the company ahead of an I.P.O. is limited (although there are exceptions). And larger offerings like Twitter’s, often mean more hype, which can cloud an individual investor’s judgment. Remember, as with any investment, it comes down to the fundamentals, current financials and long-term growth prospects. Not to mention, security fit in your overall investment strategy.

Buying with the intent to quickly flip the stock at a profit is a recipe for disaster. Even Wall Street insiders admit they can’t predict the future. A better approach may be to look at what a company does and ask if it is something that will be needed in the future. As always, take the long-view with stock investments. Is the company going to around for the next ten years, if you believe so, maybe the better strategy is to find several stock companies in that industry sector and buy a basket of stocks.

Conversely, not buying the I.P.O. does not mean you should forget about the company. If an investor bought Facebook shares at their low of $18 three months after the I.P.O they have a nice gain currently. Seventeen months after the I.P.O. the stock is trading around $52 a share.

Finally, if it’s something you know about and you have an insider’s perspective on it, an I.P.O.is a way to gamble on that perspective, with maybe better odds due to the depth of your knowledge. Put another way, if you have 20 years in tech and are determined that social media has continued upside for the foreseeable future, buy that I.P.O., but remember, it’s still a bet.

CBlakely CFP®, CTFA      11/2013

Source: New York Times - Business Day, Fidelity Investments

An Interesting Summer Indeed!

I took most of this summer off. Not because I'm too busy to write or not because there was nothing of interest to write about (on the contrary). Nope, it was because I spent most of the summer rehabbing from a very complex surgery.

The condition was described to me as an aortic dissection, which occurs when a tear in the inner wall of the aorta causes blood to flow between the layers of the wall of the aorta. Aortic dissection is a medical emergency and may lead to death rather quickly even with treatment, as a result of decreased blood supply to other organs (brain), cardiac failure, and sometimes, as in my case, rupture of the aorta. My aorta tore right as I was being hooked up to life support. Lucky timing, HooWah!

Why Am I telling you this? Two reasons, first, if you have high blood pressure make sure you treat it. It's easy and inexpensive to treat hypertension. There is a reason it's called the silent killer, cause you normally feel fine right up to when you don't, and by then it may be too late. 

Next, because of technology. Without the current technology available to the Doctors in the operating room, my chance of survival was exactly zero. There was no chance. But today, with mechanical valves, Dacron™ sleeves to replace arteries, new surgical techniques, patient monitoring systems and integrated big data (yep) this second chance becomes reality for me and tens of thousands of other patients every year.

Health care accounts for one in five dollars spent in the United States. It’s 17.9 percent of the gross domestic product, up from 4 percent in 1950. And technology has been the main driver of this spending: new drugs that cost more, new tests that find more diseases to treat, new surgical implants and techniques. Much of the spending has been worth it. While the U.S. spends the most of any country by far, health care is becoming a larger part of nearly every economy. That makes sense. Better medicine is buying longer lives. 

How does this segue into investing? Well, speaking of amazing new medical devices and technology, Vanguard has low cost Health Care ETF - (ticker symbol VHT) with a solid risk reward profile. The return since inception - after taxes on distributions - is 7.08 percent. The fund was started in 2004. The passively managed fund, which has an expense ratio of 14 basis points, tracks the performance of a benchmark index that measures the investment return of stocks in the health care sector, and holds names like Johnson & Johnson and Gilead Sciences - companies involved in providing medical or health care products, services, technology, or equipment.

Now factor in the Boomers whose first wave is already hitting the retirement years and have the money to afford procedures (elective and otherwise) and Medicare that spent $562B in 2012 and that's pretty good built in demand for medical technology and devices in my opinion.

Should everyone allocate assets to a sector fund? No, not all investors should allocate assets to this sector or any other sector for that matter. What I suggest is talking to your advisor to see if your risk profile permits any allocation and how it fits into your overall strategy. There is additional risk involved when investing in a narrow band of the stock spectrum and the potential for additional reward.

CBlakely, CFP®         09/2013