From Hollywood to Wall Street: The Truth About IPO Investing

October 27, 2023

From Hollywood to Wall Street: The Truth About IPO Investing


Spotlight's on! Welcome to today’s blog post, where we're taking a cinematic journey through the world of Initial Public Offerings (IPOs). By the time the credits roll, you'll have a better grasp of the drama and excitement that surrounds the world of IPOs—just like a Hollywood blockbuster. But before we roll the film, a quick PSA: Our plot may be gripping, but it's best enjoyed as a sneak preview—not a full feature film on financial advice. To be clear, nothing in this is financial advice. For a tailored script that hits all the right financial notes, consult a fiduciary financial advisor who knows your unique story inside and out. Got your popcorn ready? Lights, camera, action!

What Is an IPO Anyway?

First things first, let's break down what an IPO is. An IPO, or Initial Public Offering, is when a private company decides to go public, offering shares for sale to institutional and retail investors alike. It’s akin to a Hollywood debut, where an actor or actress gets their big break and finally steps into the limelight. And much like in Hollywood, not all IPOs are destined to be stars. Some might even be… dare we say, box-office flops?

Let's Understand the Lingo

Before we dive deeper, let's get comfortable with some of the terms we're going to encounter:

  • Institutional Investors: Think of these as the big production studios of Hollywood—like Universal or Warner Bros. They're the large organizations such as mutual funds, pension funds, and insurance companies that invest huge amounts of money. Because of their size and influence, they often get 'early access' to investment opportunities, sometimes even before the IPO.
  • Retail Investors: These are the moviegoers, people like you and me. Retail investors invest their own money but usually in much smaller amounts compared to institutional investors. When a company goes public through an IPO, retail investors often get a chance to buy shares, although it's generally after the institutional investors have had their pick.
  • Volatility: Imagine a movie that's getting mixed reviews: some folks love it; others can't stand it. Its reputation is swinging wildly—that's volatility. In the context of an IPO, volatility refers to how much the price of a stock is expected to fluctuate. High volatility means the stock price could swing dramatically in either direction, making it a riskier bet.
  • Fiduciary Financial Advisor: If you're not sure what this term means, don't worry, we've got you covered. Check out our detailed article on What Is a Fiduciary Financial Advisor and Why Should You Care?

Now that we're all on the same page with these terms, let's get back to understanding IPOs!

Hollywood Takes on IPOs

While IPOs haven't been the main focus of many blockbuster movies, they do make an appearance in films that offer an intriguing—if sometimes exaggerated—view of the financial world. In "The Social Network," for instance, Facebook's march toward its IPO serves as an underlying subplot that adds layers to the drama. "Wall Street: Money Never Sleeps" features Gordon Gekko trying to orchestrate a comeback in a modern financial landscape, tapping into the allure of IPOs. And who could forget "The Wolf of Wall Street," where the IPO of Steve Madden becomes a pivotal, if not infamous, moment in the story? Each of these films offers a different take on IPOs, capturing the excitement, risk, and sometimes even the darker aspects that can come with them.

What Hollywood Gets Right

  • The Hype: Just like a big movie premiere, IPOs often come with a lot of hype. Everyone’s talking about them, and anticipation is high.
  • The Risk: Hollywood often portrays investment as a risky endeavor, which is not far off the mark. Investing in a new IPO can be volatile, offering both big potential gains and losses.

What Hollywood Gets Wrong

  • Overnight Millionaires: While Hollywood often portrays characters who amass great wealth quickly after an IPO, the truth is that the most significant gains typically accrue for those who invest well before the public offering. Consider PayPal founder Peter Thiel: He invested $1,700 in a Roth IRA in 1999, long before PayPal's IPO. That investment ballooned to an astounding $5 billion, and because it's in a Roth IRA, it's all tax-free. However, it's crucial to understand that such a dramatic success story is incredibly rare. Thiel's case is the exception, not the rule, and the likelihood of replicating such success is minuscule. It serves as both an inspiration and a cautionary tale, underscoring the idea that wealth from IPOs is often built long before the company goes public.
  • Dramatic Flair: Not every IPO is a battleground of corporate espionage or betrayal. Most are just standard procedures, but hey, that wouldn’t make for a compelling film, would it?

The Takeaway for Wealth Management in 2023

While investing in IPOs can bring to mind the glitz and excitement of a Hollywood premiere, it's worth noting that some of the greatest investors of our time, like Warren Buffett and Charlie Munger, generally steer clear of them. Why? They prefer companies with proven business models and a history of profitability—elements often missing in new IPOs. In the finance world, some might even label those who invest heavily in IPOs as "dumb money," a term used to describe investors who follow trends without doing adequate research.

Here's what you need to keep in mind:

  • Due Diligence: Before you take the plunge, ensure you understand the company's business model, risks, and growth prospects. Dig deep, beyond the headlines.
  • Risk Tolerance: Assess whether the volatility that often comes with IPOs aligns with your overall investment strategy and risk profile.
  • Professional Guidance: Investing in IPOs can be a gamble. Even the pros take a cautious approach, so it's wise to consult with a fiduciary financial advisor to determine if an IPO is right for you.

Further Reading

If you've found a growing interest in the realm of investing, fuel that passion by exploring further insights on the McKee Financial Resources Blog.

Remember, the world of IPOs may have its fair share of drama and excitement, but it also requires serious preparation and due diligence. Unlike a Hollywood film, the stakes in IPO investing are real, and the outcomes can significantly impact your financial well-being. As always, consult with a fiduciary financial advisor to ensure you're making the best choices for your unique situation. Ready for the next premiere in your investment journey? Grab your popcorn—and your portfolio.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Article written by: Anthony Owens

Copyright © 2023 Anthony Owens @ Thriving Wealth Hub.

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