Useless IPO Advice from Cramer

CNBC quotes Jim Cramer today in an article that is terribly misleading. Of course, their deluding journalism actually becomes dangerous when investors use it as a basis for investing real money.

Cramer is first quoted with the juicy stuff…how to make 30% in one day. If you invest in IPO’s and “If you nail it, if you get in on the right one, you can have gains of 20%, 30%, even 100% in a day.” says Cramer.

The same could be said of most games in Las Vegas. But just mentioning 100% gains in one day is enough to suck the reader into reading the rest of the article.

Cramer then goes on to say that, although buying before the IPO can work, you should NOT buy right after the IPO. He claims to have statistics showing they are often losers.

Well…Cramer just expounded on the benefits of IPO’s in the previous paragraph. If they become bad investments at some point, shouldn’t you sell them? How long after the IPO do they become bad investments? One month, one week, one day… hour….maybe one millisecond? I’m not being facetious. High frequency traders count the milliseconds these days.

This is a serously mixed up message here. Buy IPO’s because you can make a lot of money. Just don’t hold on to them too long because at some point they become awful investments. How long…no advice given.

Sounds like a juicy article that is semi-misleading and doesn’t provide any specific, salient advice. Ahh, the epitome of CNBC’s financial journalism.

Here is the reality

There are, in fact, a lot of studies and statistics showing that IPO’s are, on average, bad investments relative to the rest of the stock market. Some IPO’s have huge returns while some crash, but when you average them all together, IPO’s have much lower returns with much more volatility than the rest of the market.

Why is this? We don’t know for sure. It may be because IPO’s have a gambling appeal that irrationally raises their valuations, but we really don’t know. All we know is the data is clear, they have historically been bad investments on average.

The solution

Stay away from them. Most of the investments I use for clients wait 3 years after the IPO before putting a stock in the portfolio. This is enough time for the IPO effect to be washed out. There is no reason to gamble with IPO’s when you are investing and preserving wealth for multiple generations.

Image by Tulane Public Relations