I bought a stock when it went public last year. A major brokerage was the underwriter and had a price target of $30 on the stock. I thought it was a good idea to buy the stock at $18 because I thought it would go to $30. The stock yesterday was trading below $1. How could the brokerage have been so wrong?
Didn’t the analyst, a professional, do their due diligence before posting such a high price target? It seems that they have set a high price target to generate interest in the IPO. Is it ethical? Granted, other companies also cut their stock price targets a lot, but the underwriter had the higher target. I feel like a “sucker” buying it so expensive.
feel like a fool
Dear feeling,
The subscriber wants to make money. Management wants to make money. Brokers want to make money. And investors want to make money. Everyone has their name in the hat for the same reason. Not everyone wins. And sometimes everyone loses. (I removed the name of the brokerage and company from your letter and read the company’s own description of its services, and I still have no idea what it does. J hope you have/had a better idea.)
It’s a game of chance, and no one, like any IPO prospectus will tell you, can predict the future. This is why before going public, companies warn investors that the stock can go down as well as up, that the company could go bankrupt and a myriad of other possible disasters. You buy at your own risk and the big brokerages – even the ones that were IPO underwriters – often lowered their own price targets for the stock, as happened in this case.
The analysts who underwrote the IPO and wrote the initial investor report before the IPO work on the “buy” side of the brokerage. Analysts who evaluate a company’s financial results, competitors, management skills and other business plans after the IPO are on the “sell” side. This is the brokerage side of an investment bank, and these analysts are expected to reach their own objective opinions, regardless of an investment bank’s role as an underwriter.
Every investor wants to enter the ground floor of the next Tesla TSLA,
or Apple AAPL,
or Netflix NFLX,
or Amazon AMZN,
In his book, “The Waltz of Wall Street,” wealth manager Ken Fisher has a fairly simple, yet frankly refreshing, explanation of your dilemma. “IPO stocks often go up immediately because the brokers who sell them receive multi-percent sales commissions for their hype, so they create a lot of insane momentum around these issues,” he writes.
““Watching an investor who made his fortune on an individual stock is like listening to that person who wins an Oscar and says you can manifest your destiny and not give up on your dreams.””
“Investors are sucked in by excitement and by dreams of great success,” Fisher added. “And they’re usually hit, because companies only raise money through equity offerings when the price is right for them – which is too high on average to be a bargain for buyers. Soon, the hype is fading and stocks are crashing. The era of the metaverse and social media hasn’t changed that. How do I know? Fisher wrote these warnings a year before the financial crash of 2008.
Investors, however, often complain about the opposite problem: IPOs are often undervalued, and this issue is among the most studied anomalies in stock markets. This recent review looked at a large body of research on the subject and concluded that companies want to raise their profile as well as raise funds, and concluded that underpricing is largely due to “the asymmetry of information “. Clearly, it refers to one or more parts having more information than others.
“Some investors are more knowledgeable than others. In other words, they have a better knowledge of the quality of companies, which are undervalued or overvalued,” wrote author Kelai Wang. His other conclusions may also apply to your overvalued IPO case: “Due to capital constraints, it is assumed that the stock market is not fully filled with knowledgeable investors. IPOs need to be undervalued to keep less informed investors in the market.
Investing in individual stocks is a fool’s game, unless you bought Apple 40 years ago at $22 a share. But even those who have done it and tell you that success can be reaped by buying an individual stock (a) probably bought the stock a long time ago, (b) held it for a long time, and (c) has got lucky. Watching an investor who made his fortune on an individual stock is like listening to that person who wins an Oscar and says you can manifest your destiny and not give up on your dreams.
They believe it because they did it, and they want you to believe you can do it too. Of course, some find a lucrative side-hustle promoting their theory of how to get rich and famous by reverse-engineering their own good fortune and selling it to the masses. They write books on how to get rich (quickly), give TED Talks on how to get rich (quickly), and appear on their own TV shows on how to get rich (quickly). But remember: even Warren Buffett makes mistakes.
It’s easier to get rich slow through real estate, compound interest and retirement savings. If you decide to keep this stock, come back to me in 40 years.
Yoyou can email The Moneyist for financial and ethical questions at qfottrell@marketwatch.com, and follow Quentin Fottrell on Twitter.
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