Twitter (TWTR) launched its IPO this week; the stock almost doubled in its trading debut, as investors paid a premium for its promises of fast growth. Twitter shares rose as high as $50.09, after the company sold 70 million shares at $26 in its initial public offering yesterday, raising $1.82 billion. Bloomberg.
Twitter has a fabulous product, one that has changed the way news reaches everyone. The short nuggets of news have many enthusiastic supporters and a growing user base with over 30 million users. While Twitter is a great product, investing in the Twitter IPO is different. In general, investing in IPO’s can be tricky for long-term investors. For anyone itching to buy the latest IPO in the headlines, one should be cognizant of few things:
1) IPO prices can be volatile. When a stock is launched, its share price is generally governed by market hysteria more than any rational long-term assessment of the stock and company fundamentals. The rising price of Twitter stands in stark contrast to Facebook’s IPO’s last year, which was marred by a trading snag on the NASDAQ and investor backlash over its valuation.
2) Generally speaking, IPO’s reflect current headlines and investor emotions. Warren Buffett noted in May 2012 after Facebook’s IPO that the “worst mistake” an investor can make is to buy or sell stocks “based on current headlines.” Bloomberg.
Chasing the next “big hit” in stocks is not something we do. GV’s long-term investment strategy is based on spreading financial risk across a wide variety of investments; we select an appropriate mix of stocks, bonds and alternative investments based on each individual’s financial goals, risk profile, short-term cash flow needs and long-term investment desires, as compared to investing in higher-risk investments that have the potential to become the “fatal mistake” that could permanently impair one’s financial future.
Many seasoned money managers with a focus on long-term investment performance, including those we select for our client portfolios, typically shy away from investing in IPO’s, preferring to pick stocks based on a good understanding the company’s revenue, margins, profits and other factors that explain the company fundamentals rather than the initial emotion and speculation typically generated in an IPO.
Once the momentum, hysteria and emotion surrounding Twitter’s IPO die down, investors can focus on company fundamentals and evaluate Twitter on the merits – is this company’s stock one you want to own long term?
It can be fun and exciting to ride the up-down-up of the roller coasters at Six Flags, but we advise staying the steady course with your nest egg.