You must have heard the big news of the week… Twitter’s going public. Want a piece?
“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 1st sentence; the 2nd 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.