Don’t Underestimate How Little People Know About Investing

You must have heard the big news of the week… Twitter’s going pub­lic. Want a piece?

Why?

“It’s hot. It should go up.”

If that’s all you know about the com­pa­ny’s busi­ness, well, you might be as ‘unin­formed’ as these peo­ple:

Excitement for Twitter’s com­ing IPO is run­ning pret­ty high – so much so that some investors on Friday mis­took the near­ly worth­less stock of long-dead elec­tron­ics retail­er Tweeter for the “tweet­ing” site, send­ing shares up more than 1,000 per­cent.

In fact, to find a link for this post I googled “twit­ter files for IPO”. First sen­tence of the first result?

Twitter has filed to go pub­lic, say­ing it will sell shares under the name TWTR.

It gives you the tick­er sym­bol right there. How could you get it wrong and buy the wrong com­pa­ny, even if you did­n’t real­ize their IPO has­n’t hap­pened yet ((In your excite­ment you might have missed “will” in the 1^st sen­tence; the 2^nd sen­tence real­ly ham­mers future tense home: “The IPO will ini­tial­ly seek to raise up to $1 bil­lion.”))?

The stock mar­ket has rules. If you don’t even real­ize what fil­ing a S‑1 means, why are you buy­ing into an IPO (IPO suc­cess is quite spec­u­la­tive)? Let me rephrase. You can buy into the IPO, but real­ize that you’re not invest­ing, you’re gam­bling.

As it turns out, I have been asked pri­vate­ly ((I encour­age stu­dents to email me directly/privately if they have ques­tions.)) what I think about the Twitter IPO. He’s my response:

It’s a risky bet (a tech­nol­o­gy IPO). The way most peo­ple should play this is, if they have an invest­ment “bud­get” for risky stuff (a rea­son­able num­ber is about 10–15% of total invest­ments), they could use Twitter as one of 4–5 things to pur­chase to diver­si­fy their risk.

Of course, we need to think about how a ‘trad­ing strat­e­gy’ (Elephant’s Paycheck is not a trad­ing strat­e­gy, it’s a wealth build­ing strat­e­gy) works for mod­est investors. If you were invest­ing $100,000 — you might take $15,000 and put it into risky/speculative IPO’s. Of that $15,000 you’d split that between sev­er­al… You might see where I’m going:

1. you should have a lot of mon­ey if you want to spec­u­late rather than invest

2. even with a lot of mon­ey, maybe you’re buy­ing $10,000 of Twitter… then what? Let’s say it dou­bles? You earn $10,000, give Uncle Sam $5,000 (est.) of that, and then have to invest in some­thing else. What? The longer you take to decide, the longer you have no growth on that mon­ey. It’s not as com­pelling as it looks… (Unless your bro­ker­age can get you IPO shares, mean­ing, priced at the IPO price. This hap­pens usu­al­ly for pre­mier cus­tomers — peo­ple with a mil­lion dol­lars or more in their accounts.)

Look at Facebook. By the time reg­u­lar peo­ple could have pur­chased it on the open mar­ket, it was up from the IPO price. Then, it dropped, and for more than a year, was below the IPO price. Now it’s doing OK, but… how do you know that would have hap­pened? Maybe they would have been like Groupon (remem­ber how hot that was? It’s down over 50% over 2 years).

These are my thoughts biased by my Elephant’s Paycheck expe­ri­ence. It’s cer­tain­ly fun to buy some­thing cul­tur­al­ly rel­e­vant… but it real­ly is a gam­ble, not an invest­ment. (Again, it’s dif­fer­ent if you can get shares at the IPO price, or if you work there and have been accu­mu­lat­ing shares at some low­er val­u­a­tion.)

Wish I had bet­ter news about Twitter? Well, it’s a real­ly help­ful tool. Why not con­nect with Elephant’s Paycheck?

Don’t use it? Why would you think about buy­ing IPO shares if you don’t believe in the prod­uct enough to use it? Remember, build­ing wealth isn’t about mak­ing one good deci­sion, it’s about a long term strat­e­gy. Try our free email course to learn how to get start­ed, stay moti­vat­ed, and build wealth over time regard­less of whether you ever “hit” a big IPO.