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Are IPOs a Good Investment?

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Lemonade, a fast growing insurtech company recently took its stock public. Listed on July 2, it sprinted out the gates. In only a few days, the price soared 200%. Rocketing from $29 to $90.

Lemonade is a breath of fresh air in the insurance industry. An old-school, high-margin industry ripe for disruption. This is a compelling story, one that made me pay attention pre-IPO. When the IPO happened, I couldn't help but to regret not investing. I could have tripled my money!

IPOs are naturally tempting. The potential leaves investors salivating. The chance to get in on the ground floor of a future Amazon? Sign me up.

As exciting as they seem, their historical performance leaves a lot to be desired. IPOs are just stocks, and like most individual stocks, they underperform the market.

Even if we just look at first year performance, where interest is highest, underperformance is prevalent. A DFA study analyzed the first year performance of over 6000 IPOs from 1990-2018 and found that they lag behind the market by 2%.   

Compelling stories are not enough to make great investments.

Uber is incredibly popular. They dominate the world of ride-sharing and have completely displaced the legacy cab industry. A true disrupter. A great investment, right?

Well....Uber IPO'd at $45 in 2019 and a year later it's trading at around $30.

What about Fitbit? Everybody has one, health-awareness is growing, wearable tech is growing, this has to be good.

Nope. Fitbit IPO'd at $20 in 2015 and 5 years later it's trading at around $6.

It's really hard to predict which IPOs will turn out to be great investments. Some might have a strong first day or first few years but if history tells us anything, most will fail. There will only be a few extreme winners and it's near-impossible to pick them.

So despite the initial FOMO, I won't be buying Lemonade, or any IPO. While they're exciting, I've come to realize successful long-term investing tends to be boring. I'll stick to my index funds.












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