Don’t Believe the Hype – I.P.O.s Can Be Great for Issuers, Dangerous for Investors

In an op-ed for the New York Times, Teresa Tritch warns investors against getting caught up in the hype surrounding the resurgent I.P.O. market. In a memorable turn of phrase, she writes “There’s a certain electricity in the air—and I’m reaching for a gas mask.” Tritch counsels that I.P.O.s “should raise suspicion, not excitement.”

The reasons to be leery of I.P.O.s are straightforward. First, a company’s decision to raise money through the public equities markets can be a sign that they have run out of other ways to grow.

And second, the IPO market is markedly outpacing the economic recovery. As Tritch writes, “In general, the number of I.P.O.s and the amount of money raised track with the health of the economy. When the economy stalls, so do I.P.Os. When it recovers, so do I.P.O.s.”

But for the past several years, the stock market has risen much faster than the economy at large has grown, propped up by the Federal Reserve’s monetary stimulus policies.

This dynamic should get investors’ antennae up and serve as a reminder that when making investment decisions, it generally makes sense to beware of the “latest and greatest” and stay focused on companies whose business model actually makes sense to you. With that in mind, you may avoid falling victim to the hype that serves very little purpose other than to line the pockets of I.P.O. issuers’ insiders’ pockets.

If you have suffered a loss as a result of your broker pitching an I.P.O. using misleading tactics, please contact The Galbraith Law Firm at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.