Nothing keeps you humble like investing in stocks. On Wall Street, the road is paved with good intentions – and spectacular falls from grace. With WeWork, investors never even had the chance to buy stock! Once valued at $47 billion, WeWork was supposed to be among the hottest IPOs of 2019. Then once potential investors got a peek at its financials, they saw that the coworking office-space company was bleeding cash. Before long, WeWork’s hard-partying CEO got the boot, and the IPO was yanked off the docket entirely.
That’s just the most salient example. But I’m sure we all remember the first time we found an exciting company, only to see it fall into a hole (or off a cliff). Or the first time we took profits off the table but had to stop the self-congratulations when the stock went even higher…without us.
That being the case, I’ve found it’s best to take your ego – and especially your emotions – out of the equation entirely. By writing stock-picking algorithms, then using those formulas to screen every single investment prior to purchase, I sleep better at night. And, frankly, I make better gains.
Along the way, I’m happy to say, my system has steered me clear of all the most common pitfalls of “emotional investing.”
Over the last week, I’ve been reviewing the most common biases, traps and mistakes that can torpedo your portfolio in my Peak Performance Series at Market360. I’m wrapping that up today with one final thought:
In the current crop of IPOs, some of the biggest “media darlings” have turned out to be the biggest losers, thus far.
If you were surprised by that, I’d respectfully point out that the reason is right in front of us.
When the media is hyping up a stock, sometimes you’ve got to switch off the TV, put down your phone, or bypass the article. It’s all too easy to be swept up in a “great” story. But with an IPO, the story is all about the bright futures and great potential of these companies…rather than real facts and trends – the proven precursors of a successful investment. In short, it’s just too early to invest in these things.
And Wall Street is starting to wise up to that.
Despite the Renaissance IPO ETF (IPO) being up, several of the most anticipated IPOs of 2020 are now down off their highs. Take Airbnb Inc (ABNB), for example. The stock is down 8% from its December high. The vacation rental app created quite a buzz when it went public but faced some issues during the restrictions of the pandemic.
But when you subject it to the eight-point formula behind my stock-picking system, Airbnb just doesn’t measure up.
For example, Airbnb is not profitable and is not expected to achieve profitability this year, and its sales just isn’t strong enough to tempt me. Nor are its operating margins.
Another highly anticipated IPO of 2020, Snowflake, Inc (SNOW) recently fell from grace.
Snowflake was one of the largest IPOs of 2020, and actually turned out to be the largest software IPO of all time. Even Warren Buffett’s flagship investment firm, Berkshire Hathaway (BRKB), invested in it at the tune of $320 million worth of shares.
The stock officially hit the trading floors on September 16 at $245 per share. By early December, it had surged 75% to a high of $429. However, since its peak in December, SNOW’s gains have fallen by about 30%.
The trouble began with SnowFlake’s third-quarter report. Wall Street analysts were expecting a loss of $0.26 per share for SNOW’s third quarter. But SNOW lost $1.01 per share. It just goes to show the value in holding out for a proven profit engine.
Cool stocks are fun to chat about with your friends. But successful investments aren’t always “cool.” The stocks we’ll use in Project Mastermind might not be. However, I do see the potential for 100%, 200% and even 500% gains.
That’s not to say that Airbnb, Snowflake (or, heck, even WeWork) might not make 500% in their day. I have my doubts, sure. So, for now, I’m staying away.
All that said, it’s not hard to understand why so many investors like IPOs: They want to get in on the ground floor of a stock that could skyrocket. Maybe in a few years, once they’ve established real revenue and profits, some of their stocks will double or triple, or more.
However, the stocks I’m looking at appear likely to deliver those gains in months instead of years. And without taking extraordinary risks.
I hope you enjoyed our Peak Performance Series, and you’re ready to banish the most pernicious biases from your investing. I’ve got my eye on the upcoming earnings season, and I’ll be back with more on that topic soon. In the meantime, if you missed my Project Mastermind presentation, click here to learn more and get in on the action.