Within a few days of going public, Facebook fell by over 20%.
If you were one of the people who bought that IPO, what would you do?
Would you sell Facebook at a 20% loss or hold on to your shares, seeing how this company could generate billions of dollars in revenue and turn into a massive player in the lucrative digital ad market?
The choice is always there. And sometimes, the right thing is hard to do.
Here at the Financial Star, we’re looking out for new opportunities to bring to your attention.
But it takes experience and guts to stick to what you believe is a great one.
Let us show you some of the mistakes IPO investors make—and ways to avoid them.
Mistake 1. Selling too Early
The people who sold Facebook (now called Meta) at a double-digit loss missed out on one of the biggest money-making opportunities of the past two decades.
They got scared and ignored the fact that the company’s management was laser-focused on growth, and it kept delivering on its promises.
This is probably the most critical point to remember.
New IPOs don’t go up in a straight line.
Nor do any other publicly-traded assets, for that matter.
Volatility is part of the game, and the more experienced investors use it to their advantage. If business fundamentals don’t change (or change for the better) and the price goes down, they buy, not sell.
Mistake 2. Not Paying Attention to Current Trends
Companies don’t go public out of the blue. There must be a compelling reason for them to make their shares available to the market.
One of those reasons is market trends. If investors favor the business the company is in, it could go public and hope to get a good valuation.
For example, some of the sectors that investors favor these days are clean energy, electric vehicles, green commodities such as lithium, hydrogen or ammonia, telehealth, gaming, and others.
A company working in those sectors has a good chance of getting treated well by the investor community.
Other companies go public so that their management can sell the shares it holds at a profit.
Which is probably one of the worst situations as far as individual investors are concerned.
This is another critical point.
Companies that work in the industries and sectors favored by the market might be more compelling as investment opportunities.
Those going public just to make their early investors rich at the cost of the investment community should be looked at with skepticism.
Mistake 3. Ignoring the Company’s Ability to Tell Its Story
A young IPO should be able to communicate its value proposition to the investment community.
It should be able to tell why it went public, what it expects to achieve and when.
It sounds simple, but it’s not easy to do, and not all companies are good at it.
As a new IPO, it doesn’t have much recognition. To get it, it should earn investors’ trust.
It could hire an external marketing agency or take care of marketing in-house.
But it needs to constantly put the word out to make sure the market is aware of what it is up to.
In our experience, we have seen companies’ share prices get clobbered just because they went silent for a while.
It’s a good idea to check how well a company communicates its mission and milestones to investors. It’s necessary for the stock to stay relevant.
Lesson: Tilting the Odds in Your Favor
Even though investing is risky, the payoff could be huge. That’s why investors keep doing it.
Facebook was a blockbuster investment for those who didn’t sell on day-to-day volatility.
Every month, new companies go public. Some of them will be future Facebooks.
Their shares get under the spotlight of the investment community; sometimes, a bumpy ride follows until the price settles within a certain range.
The three mistakes that we discussed, we hope, will help you focus on the best investment opportunities.
To avoid selling too early, it’s better to focus on the long-term potential of the company. This will make it easier to withstand day-to-day volatility, which is often random and meaningless.
Instead of that, focusing on fundamentals like revenue growth and cash on the company’s balance sheet is a better use of investors’ time. These numbers don’t change as frequently, and they provide a better clue as to where the company is as a going concern.
To avoid missing out on the best opportunities in the market, follow the broad trends that get attention these days. Clean energy, plant-based food, vehicle and grid electrification, and others—these are top-of-the-mind trends for many investors.
Finally, focusing on the companies that tell their story in a clear way is critical. As new IPOs, they need to persuade the market that it needs to pay attention to them.
The top ones get their story out and deliver on their growth projections.
If their story and their business execution align, it’s a very good sign of an IPO that could have potential.
We hope these reminders were helpful to you.
Thank you for your loyal readership,
The Financial Star team