The trending topic in the investment world is the fact that Facebook is going public.  With the IPO date quickly approaching, we focus today’s show on the ins and outs of initial public offerings and what happens when companies don’t live up to the hype.

An IPO is the first sale of a stock by a company to the public.  It is typically used by a company to expand and become a publicly traded enterprise.

Benefits of going public:

• Bolstering and diversifying equity base
• Enabling cheaper access to capital
• Exposure, prestige, and public image
• Attracting and retaining better management
• Facilitating acquisitions
• Creating more financing opportunities

Disadvantages:

• Significant costs
• Ongoing requirement to disclose financial and business information
• Time, effort, and attention required
• Risk that required funding will not be raised
• Must put out a lot of public information that could be useful for competitors

 An Empirical Investigation of Initial Public Offering (IPO) Performance – Zachary A. Smith, Ph.D.
Dr. Smith’s research illustrates that there is usually a pop (possibly due to the stock being undervalued) on day one, negative movement lasting through trading days two through seven, and then stabilization during the lockup provision.  He goes on to report that after IPO’s reach their lockup expiration, they are likely to experience negative performance of approximately .05% points in value each day for approximately one year.  His general conclusion:  when it comes to participating in the IPO market, buyer beware.

A Business Insider article we found also discusses What you need to know before you invest in IPO’s.  Dr. Jay Ritter found that the average three-year return of IPO stocks lagged the average three-year returns of similar non-IPO stocks by 7.2%.  The article suggests that there are other ways to seek high risk – high return trading activity, such as buying options.  The historic long-term performance of IPOs is lackluster in comparison to non-IPO stocks and many who are attracted to this type of investing are listening to the media hype.

We close out today’s show by discussing what we call the “IPO Graveyard”.  Here are some highlights from 15 Companies Whose IPOs Were Complete Flops:

• Vonage:  The company raised $531 million on the first day, but lost 30% of its value in its first seven days of trading.
• Webvan:  The company raised $375 million in its IPO, but ultimately filed for bankruptcy and had to lay off some 2,000 employees.
• eToys:  The company managed to raise a massive $166 million IPO in May 1999, but in February of 2001, the stock tanked to .99 per share.
• Pets.com:  The company raise $82.5 million in its February 2000 IPO, but went out of business just nine months after going public.
• Hertz:  Even though it was a household name, this company’s stock barely rose above its starting price of $15 per share on day one of trading.

In general, we are long-term investors and try not to get sidetracked by the “flavor of the week” investments.  That being said, if you love Facebook and want to own it for the sentimental value or to show your support for the company, there is nothing wrong with that.  We just want our listeners to be as informed as possible and make the right choices for your financial success.

If you have any questions for us or want to share some IPO investing stories, please leave a comment or write us on our Facebook wall!

The average shopper may blindly pay retail price for their goods.  The average investor may make rookie investment choices that cost them dearly.  But Money-Guy listeners are anything but average when it comes to financial matters.  In today’s show, we talk about the rewards involved with being an above-average shopper and investor.

We have mentioned in past shows that we pride ourselves on saving 3-7%  more than the average person does on purchases.  A couple of our favorite shopping tools to stretch those dollars are:

• Upromise:  Upromise is an incredible tool that allows you to accumulate savings for college by simply signing up and making everyday purchases.  They recently sent out a press release stating that their already-amazing service just got even better.  You can now earn 5% cash back (or more) with every Upromise online shopping purchase to go towards higher education.
• Ebates:  Ebates is another great program that offers cash back on purchases at over 1,500 stores.  Additionally, you can sign up for a $10 gift card after your first time purchase of $25.

By using these tools along with various credit card rewards, you can shop smarter than the average person and reap the benefits of your hard work!

The second part of today’s show focuses on DALBAR, Inc.’s Quantitative Analysis of Investor Behavior.  Don’t let the long, boring name fool you.  The data here about what the average investor does wrong is actually really interesting.

• Retention rates:  We always say that to be considered a long term investor, you want to be able to lock your money up for 5-7 years.  If you think you may need the money in the next 1-4 years, you might want to stay in cash.  Research shows, however, that for the last 20 years the average holding period for equities is 3.29 years and for the bond market, 3.09.  Despite evidence that long term investing produces greater return, investors are still reacting to market movements and getting out too early.

• Market Timing Failure:  The report states that “for the calendar year of 2011, we can see more clearly how investors’ attempts to time the market are futile.  The largest uptick in the S&P 500 occurred in September, a month when fund flows were close to 0% of total assets.  Fund flows were near 10% of total assets 2 months later.  Unfortunately, by that time the S&P had lost nearly half of its September gains.”  Timing strategies and day trading is proven to be a bad strategy by this data.  No one has the magic ball that tells them what to do and when to do it.

• Irrational Decisions Lead to Inferior Results.  We have been saying for awhile that what has been perceived as safe in the past is now riskier and vice versa.  The data shows that in 2011, investors lost 5.73% in their flight to “safety” compared to a gain of 2.12% for those simply holding the S&P 500 Index.  Additional data shows that on the 20-year level, the average equity investor made 3.49% while the S&P 500 made 7.81% for a 4.32% spread.  The average fixed income investor made .94% while Barclays Bond Index made 6.5% for a spread of 5.56%.

We challenge you guys to take a look at your performance over the years and see how you measure up.  If you are a Do-It-Yourselfer who has fallen prey to some of these bad investor behaviors, you may want to consider getting a professional to help you.  Volatility isn’t going anywhere and, unfortunately, the average investor is using fear and market timing and apparently they are paying for it.  We want all of our listeners to be above-average shoppers and investors and find financial freedom and success.