May 28 • 3 min read
Before You Chase the Next Mega-IPO
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This could be the biggest year in history for IPOs. Not because of how many companies are going public, but because of how big they are. SpaceX, OpenAI, and Anthropic could each come to market valued at $1 trillion or more. SpaceX alone has been floated at a valuation approaching $2 trillion, which would make it the largest IPO of all time. Companies that size would instantly rank among the 20 most valuable public companies in the world. So it's no surprise I've been getting the same question for months: "Is there a way to get in before the IPO?" or "Should we buy as soon as it's available?" I understand the excitement. These may be some of the most transformative companies of our lifetime. But I generally don't recommend buying them, and I want to explain why. In today's email:
*** Before we dive in, did you catch this week's podcast? 👇 Picking the Right Stock Is A Low-Probability GameOwning a great company and earning a great return are not the same thing. Research going back to 1926 found that just 4% of individual stocks drove essentially all the net wealth created by the entire U.S. stock market. Miss those few names, and your returns would have suffered badly. The flip side is even more sobering. In that same body of research, the majority of individual stocks failed to beat t-bills over their lifetime. SpaceX, OpenAI, and Anthropic may well end up in that elite 4%... nobody can say for sure. But that's exactly the point. Concentrated stock-picking is a guessing game with long odds, which is why I prefer broadly diversified globally portfolios supported by robust evidence. You capture the outlier winners without having to guess which ones they'll be. IPOs Have a Tough Track RecordBuying into the excitement of a new listing has historically been a difficult way to earn strong long-term returns. Looking at nearly 10,000 IPOs since 1980: → The average IPO underperformed the broader market by more than 20% over its first three years. → Nearly 60% of those companies delivered a return of 0% or less in the three years after going public. That doesn't mean every IPO is a bad investment. But by the time the excitement and demand are baked into the opening price, the odds of earning an attractive return often aren't in your favor. These Three Face An Extra HeadwindThere's one more wrinkle to consider: these companies would arrive at extraordinarily high valuations. That's not a prediction of failure. But the higher the starting price, the more future success a company has to deliver just to justify it... and that says nothing of what's required to make it a great long-term holding. History has shown that exceptional companies and exceptional investments are not always the same thing. What This Means for RetireesWhen you're drawing income from your savings, a concentrated bet that goes wrong isn't just disappointing, it can put your plan at risk. That's the real issue. Not whether SpaceX is a great company, but whether a single speculative position belongs anywhere near the money that funds your retirement. If you still feel strongly about participating, treat it as exactly that — speculation, not part of your core plan:
A good plan is built to survive a bad guess. The trick is making sure no single guess can ever derail it. Bottom LineSpaceX, OpenAI, and Anthropic may turn out to be remarkable companies. That was never the question. The question is whether chasing them is a reliable way to reach your goals, and history says concentrated bets on hot IPOs usually aren't. My goal with the podcast and this newsletter is to help tilt the odds in your favor. With this data in full view, that means staying diversified, staying disciplined, and keeping the exciting bets small enough that they can never put your retirement on the line. 📚 What I've Been Reading
Thank you for reading! Please reply to this email with comments, questions, and/or feedback. Stay wealthy, Taylor Schulte, CFP® |