On May 10, 2019, the cable news channels were blowing up with talk of Uber’s much anticipated Initial Public Offering (IPO). With analysts chattering in the background, I sat at my computer and began typing as quickly as I could a blog on why I never invest in IPOs, and why I wouldn’t invest in Uber.
Now, before I go any further let me say, once again, I love Uber. I love the service the company provides. I love the fact that it creates jobs, and makes it easy for people to supplement their incomes. I love that Uber and Lyft have broken the ride-hailing monopoly long held by big taxi companies. But just because I love the company, doesn’t mean it’s a good investment.
As an investor, I have several cardinal rules I follow. Here’s one:
Invest with your head, never with your heart.
Never buy a company’s stock just because you like the brand or what the company stands for. It can be the most benevolent company in the universe, run by the nicest people you could hope to meet, supplying really responsible products, but that doesn’t mean it’s a good investment. Emotion should never guide your investments.
If you like a brand, support it by buying its products or using it services. But invest in a company’s stock only if it’s going to make you money. When it comes time for you to retire, when you’re no longer able to work full time and earn what you did when you were younger, the only investment measure that’s going to count for anything is how much money your investments are providing. All that love you had for your favorite brands won’t mean anything. And your brand loyalty won’t support you when you can no longer work. Sentiment has no place in your investment decisions.
Another cardinal rule I follow, and one I discuss in How to Build Wealth and my UBERmania blog post, is:
Never invest in a stock at its Initial Public Offering (IPO).
If you’re not familiar, an IPO is when a company takes its stock public in order to raise capital. There’s usually a lot of hype to generate interest before an IPO. The hype sends investors rushing to buy the stock at the IPO price. A feeding frenzy ensues, causing the stock price to soar. More people fearful of missing out on a “sure thing” frantically rush to buy, driving the price higher still. Then the frenzy ends. And the stock price pulls back, sometimes dramatically. In many cases, the stock is trading below IPO levels within an few months of its initial public offering.
It happened to Uber’s competitor, Lyft, when the company went public the end of March and … you guessed it, it happened to Uber. In fact, Uber had a disastrous IPO.
Short-term traders might do well on IPOs, but long-term investors often don’t. And Uber’s IPO definitely did not go well for investors. It amazed me that investors were eager to buy into a company that lost $1.8B on revenue of $11.3B. And I was further amazed that a company that is bleeding so badly could garner a $82B valuation! Why would anyone buy into that valuation and go long on a company that bleeds $2B a year? I’m mystified.
In my UBERmania blog I noted that if I were a day trader I’d buy at the open, let the stock run up 4 or 5%, then dump it and not look back. While I very rarely do short-term trades, I did just that with Uber. I bought in a few minutes into the IPO at $42.64 and sold everything ninety-five minutes later at $44.68, for a 4.7% gain, just as the stock was beginning its steady, soul-crushing decent. Three days later it was trading at $37.10 a share. A great day trade … a horrible long-term investment.
Save your money. Don’t invest in IPOs. Never buy a company’s stock simply because you like the brand. And never buy overvalued stocks. Unless you’ve got another forty or fifty years to make up the lost money, limit your investments to proven, steadily-performing stocks and funds. Invest with your head, not with your heart.
