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Why Investing in IPOs is a Bad Idea

Before I get into why investing in IPOs is a bad idea, let me tell you a story that is relevant to the topic.

In the early 2000s, I was driving to a local strip mall to go to my favorite home improvement store to pick up some things for my latest project. At the time I was in my early 30s and had been way into my transition from the cool, fly guy to an iteration of my father. As I drove through the strip mall at 7:30-ish in the morning, I noticed a long line of teenage kids winding down the sidewalk. My first thought was what kid in their right, pubescent mind would be up this early on a weekend? My second thought was what store, besides Walmart and Home Depot, is open this early?

I was curious. I circled the parking lot a few times, looking like a stalker. I couldn’t stop wondering what was going on. The only time young kids did this in my generation (Gen Xer) was to go to the department store to go buy tickets for a concert. Finally, I saw some kids walking from the parking lot. They were headed towards the droves of kids patiently waiting in line. “Excuse me,” I asked. “What’s going on with the line,” I inquired. “The new Jordans are coming out,” the kids casually answered in unison. And, thus, I had my answer.

And every year after that, I noticed the lines. No matter what state I was in, the lines were all the same. And when my son came of age, he soon joined his peers in the lines. My son would come home with boxes of sneakers. My curiosity would get the best of me. I’d ask to see these amazing sneakers that had kids waiting hours in line to spend $200+ to acquire. He would smoothly open the stiff chipboard package to reveal its contents. I was unimpressed. They looked like the same shoes we wore in the 80s and 90s. The same hard soled shoes with no updates, just a new, and inflated, price. “So, are you wearing them to the game this weekend,” I asked. “No,” he replied. “I’m selling these.”

What I would later find out is that some kids, and adults, would wait in line for hours at a chance, not a guarantee, to get these shoes. The ones fortunate enough to get a pair at the Manufacturer’s Suggested Retail Price (MSRP) would flip the shoes for double that price; thus, turning a profit. The purchasers of these shoes would wear them until the soles, and the value, were worn out on them.

This is the similarity between the sneaker phenomenon and IPOs.

An Initial Public Offering (IPO) is when shares of a company’s equity, or stock, is made available in the secondary market (NASDAQ, NYSE, etc.) for the first time. The problem with IPOs is similar to the sneaker scenario. The IPO price, think MSRP of the sneakers, is a really good guess. The IPO price may or may not align with the real value of the company. Typically, the value is inflated, and the only people that win in an IPO situation are the initial investors (owners and original investors). Those that invest in the secondary market when the stock goes public will more than likely lose money in the short- or long-term and will either have to take losses on the IPO or hold the stock for years to make their money back. Once an IPO trades for about a year or so, valuations can be properly computed, and industry analysts can provide better guidance on the stock (overweight, underweight, buy, hold, sell, target price, etc.).

IPOs can be even more dangerous when they have a lot of media buzz around them. The bigger the anticipation for a company’s IPO, the higher the price will increase by the time it hits the secondary market for public consumption.

To illustrate my point, here are some of the biggest IPOs that came out between 2020 and 2021 and their current trading price as of around August 15th, 2021.

IPO Date



52-Week High

Current Price

% Change















Big Commerce






Robinhood Markets, Inc.






Paysafe Ltd.












DoorDash, Inc.












GoodRx Holdings












C3 AI, Inc.












Lucid Group, Inc.






The Honest Company




Avg Change


These are the hot IPOs of 2020 and 2021 and their combined values have sunk an average of nearly 53%. Some of these IPOs, like QuantumScape, have dropped by 85%. To put this in perspective, some investors have lost as much as 85% of their money by investing in QuantumScape’s IPO. If someone had invested $1,000, it would only be worth $150. An investment of $10,000 would be worth only $1,500. These are rough losses for middle-class investors.

The best thing to do with IPOs is to hold off on investing in them. After about a year, the hype should wear off on the stock, and all of the retail investors and emotional investors that helped to drive up the price of the stock will have either pulled out or moved on to the next big “IPO”; thus, helping the price to stabilize. Also, the lock-up period - timeframe in which initial investors cannot sell any shares - would have more than likely passed. And any initial investor with significant amounts of shares (100,000 or more) would have dumped massive amounts in the secondary market by this time, which would drive the price down even further.

But, if you do get in on the IPO craze, you should have an exit strategy. IPOs could possibly be good short-term plays. For instance, buy an IPO during its first day and flip (sell) the stock either the same day, a week later, or within a few weeks. This way, you may avoid the IPO crash. But, this is still a risk as you may be buying at the highest price on day 1 and, subsequently, the stock may have nowhere else to go but down.

In my opinion, the best thing to do is not to invest in IPOs. There are plenty other investments in the secondary market that are proven, stable, and whose value aligns with its stock price.

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