How to Spot a Top in a Fad Group—Initial Public Offerings (IPOs)

Fad groups are created when investors get irrationally exuberant about a particular group for some reason or other. The stocks go bananas, and Wall Street’s investment bankers rush companies in the group to market via initial public offerings (IPOs). Everyone seems to think that those IPOs can do no wrong and wants to get in on them; everyone thinks that it will make them rich.

Usually, the stocks belong to an industry that is touted as the “next best thing.” Very often, the first couple of IPOs do very well, and everybody gets, if not rich, at least richer. Google comes to mind right now.

While I was at Putnam in the 1970s, Ron Sadoff, an analyst ...

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