digest
Short Summary
Main recommendation: Investors should be skeptical of IPO investing, since the first-day "pop" is hard for ordinary investors to capture and IPO stocks tend to underperform after listing. The video argues that getting an initial allocation is largely reserved for high-value brokerage clients and institutions, and that buying on the secondary market later has a poor expected risk-return profile.
Key Points
- IPOs are well documented to be underpriced, but retail investors rarely get the initial allocation at the offer price.
- According to Fidelity's described process, brokerage customers are ranked by assets and revenue generated, so long-term high-value clients get priority.
- A 2018 Journal of Finance paper examining 220 IPOs (January 2010 to May 2015) found brokerage revenue from a client significantly determines IPO allocations and profits.
- A 2017 paper by Hoechle, Karthaus and Schmid, examining 7,487 US IPOs from 1975-2014, found IPO firms behave like high-beta stocks with negative value loading, and underperform for the first two years even after accounting for size, relative price, and momentum, with underperformance becoming statistically insignificant after two years.
- A 2019 Dimensional Fund Advisors study of 6,362 US IPOs (1991 to 2018) found an IPO portfolio returned 6.93% with 27.62% standard deviation, versus 9.13% and 14.28% for the Russell 3000.
Details Worth Noting
- Concrete instructions: The video gives no step-by-step buying method. Its only actionable guidance is negative: do not expect to get an initial allocation as a typical retail or DIY investor, do not speculate on new mutual funds hoping to profit from preferential IPO allocations, and if buying after listing, recognize you are buying shares with a small-growth, low-profitability, high-investment profile. The only constructive guidance is that a diversified portfolio of recent IPO stocks, rather than one stock, is needed to reduce company-specific risk.
- The 2017 paper "IPO Allocations and New Mutual Funds" (Chau, Gu, Louca, data 1998 to 2015) found new funds outperformed in their first six months, mainly from underpriced IPO holdings, then performance fell substantially.
- The Dimensional analysis excluded first-day returns and rebalanced monthly; underperformance was seen in both pre- and post-2000 sub-periods.
- The Fama/French five-factor model explained IPO returns well, suggesting IPOs behave like small-cap growth stocks with weak profitability and aggressive investment.
- The speaker frames the research as general evidence; individual outcomes depend on specific company risk.
Bottom Line
Chasing IPOs is unlikely to produce reliable profits for most individual investors, because the best opportunities go to institutions and high-revenue clients, and the stocks that remain tend to underperform on a risk-adjusted basis.
