Chart 19

“IPO” Means It's Probably Overpriced

Don't waste your time. When a company “goes public”—an initial public offering (IPO)—lots of folks rush in, hoping to get in on the next Apple Computer or Intel. They could get more at the bank. Nine IPOs out of 10 are money losers within two years. Even the few long-term winners, like Apple, rarely do well compared to the very best stocks. If you don't believe it, see how few recent IPOs appear in Forbes's annual review of the top-performing stocks (in February).

IPO stocks often rise immediately, because the brokers selling them are getting sales commissions of several percent for their hype, so they create lots of mindless momentum around these issues. Investors get suckered in by the excitement and by dreams of a big hit. And they usually get hit, because companies raise money through stock offerings only when the price is great for them—which is too high on average to be a good deal for buyers. Soon the hype wears off and the stocks get clobbered. Many of 1983's crop of new issues have since lost most of their value—like blue-ribbon Diasonics, which was once worth hundreds of millions and then the stock fell from $30 to $3. A good chunk are bankrupt now, too—like Victor Technologies, which was also a blue-blood issue.

But here's the real kicker: Not only do IPOs usually perform poorly, but as a group they can be used effectively as an indicator of when the market is overheated or underbought.

This chart shows the total number of ...

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