How To Predict, Part 2: The Downfall of the Popular IPO

Interesting article: The Downfall of the Popular IPO

Guess which two stocks this blog recommended…yup…that’s right…Facebook and Ali Baba. The odds of choosing the best two tech IPO stocks out of all possible unique pairs, by pure chance, are about 1/50, so skill is probably involved. This blog has never recommended the other eight. In fact, it warned against FitBit and GoPro. Also right about Bitcoin. But before I get too carried away, in 2015 and most of 2016, I was wrong about Trump getting the nomination and winning (and so was virtually everyone else).

In 2015, after entering the race, his odds of winning were 1/100 according to the bookies, and anyone who held realized a 100x return. Only two pundits, as far as I know, got that one right: Mike Cernovich and Scott Adams (although I don’t think any of them bet). Even if Trump proves to be a mediocre president, his victory is probably the greatest political underdog success story ever.

You don’t have to be that smart to predict. It’s about filtering out noise and having an understanding of how economics, trends, and finance works, which are skills that can be learned by most reasonably intelligent people.

Lots of people have been saying we’re in a technology bubble for a number of years now. While this IPO performance certainly doesn’t look like a bubble, if there was a bubble, the bursting of it has been outsourced from the private owners of these companies to the public owners.

Yeah, since 2009 or so, we’re seeing a ‘flight to quality’ to the biggest and strongest companies such as Google, Facebook, Uber, Airbnb, and Amazon, unlike the late 90′s when everything was indiscriminately bid higher. This is part of how post-2008 capitalism has gotten much smarter and choosier, a common theme of this blog. Pre-2008 capitalism was ‘dumb’, and there were many recessions and crisis as a result…now money is only chasing the ‘cream of the crop’ (just like how expensive real estate in expensive high-IQ regions keeps getting more expensive); hence, fewer bubbles, no more recessions, and the longest bull market ever (which this blog also predicted)–one that may last for decades to come…Right now there are headlines about topics and themes that were covered in this blog in 2014 or earlier.

Unless you’re skilled at predicting things (as I and a handful of others are), yes, the public tends to lose. But it has gotten worse because companies are going pubic too late whereas decades ago companies went IPO at only $10-$70 million, not $10-$70 billion like we see nowadays, even after adjusting for inflation. If promising tech companies went public much sooner, it would allow skilled retail investors to make higher returns, but those days are gone. The result of all these late IPOs is a much more negative skew of returns, because these companies go pubic at the peaks of their valuations and growth, not closer to the bottom. Yeah, this is a problem and further strengthens the argument for index funds, versus stock picking.

Obviously, this is a tough space to pick the winners and losers. Competition and innovation make it very difficult to know whether or not a company will continue to dominate like Facebook or be a flash in the pan like Groupon or Gopro. History shows that the majority of IPOs end up underperforming the overall markets.

Not really…this blog picks winners all the time. Facebook has 1/6 of the world population plugged in…how can such a company like that ‘fail’. Groupon relied too much on paid advertising for growth, and predictably those users stopped using the service, and the deals were pretty bad too. Facebook had pure organic growth. Fitbit and Gopro are hardware, and thus their business models are easier to replicate and have smaller profit margins; with the exception of Apple, hardware investments tend to be inferior to software (Microsoft, Salesforce) and ad-based companies (such as Facebook and Google).