Should You Buy an IPO?

This is a question I’ve been getting a lot lately.

Friends, family, and even some of my parents’ friends have been asking about upcoming IPOs, especially companies like SpaceX. With other high-profile companies such as OpenAI and Anthropic potentially following, it feels like we’re entering another major IPO cycle.

Whenever people ask me if they should buy an IPO, my answer is usually the same:

I personally don’t.

That doesn’t mean IPOs can’t make people money. Some certainly do. But before you rush to buy shares of the next hot company, it’s important to understand what’s really happening.

Who Benefits Most From an IPO?

Most people think an IPO is an opportunity for investors.

In reality, an IPO is primarily an opportunity for the company.

The entire purpose of an IPO is to raise capital. Companies and their investment bankers want to sell shares at the highest possible price because that means raising the most money possible.

That’s why you’ll often see a tremendous amount of media coverage, excitement, and hype leading up to a major IPO. That’s not necessarily a bad thing—it’s simply part of the process.

But investors should remember that the company is trying to maximize its valuation, not help you get a bargain.

What History Tells Us

If you look at IPOs historically, many don’t perform as well as people expect after they begin trading.

Take Meta (formerly Facebook) as an example. The stock struggled after its IPO and traded below its offering price for months.

Many IPOs experience a similar pattern:

• Huge excitement before the offering

• Strong volatility after the offering

• Significant price swings during the first year

Some soar higher. Others fall. 

But here is some important facts based on IPOs in the last 25 years: 

• Roughly 50% of IPOs lose money during their first year for investors who buy after trading begins.

• Roughly 60% underperform the S&P 500 over that same period.

• The median IPO’s long-term performance tends to lag the broader market.

The challenge is that nobody knows which outcome you’re going to get.

Why I Prefer to Wait

Personally, I prefer to let the dust settle.

I typically want at least a year of public trading history before considering an investment.

Why?

Because the first year gives investors time to see:

• How the company performs as a public business

• How management handles quarterly earnings

• Whether the valuation makes sense

• How the market ultimately values the company

By waiting, I may miss some upside.

But I also avoid a lot of the speculation and uncertainty that often comes with newly public companies.

The Six-Month Lockup Period

Another factor many investors don’t understand is the lockup period.

Most employees, executives, and early investors are prohibited from selling their shares immediately after an IPO. Typically, that restriction lasts about six months.

When that lockup expires, a large number of shares can suddenly become available for sale.

Think about an employee who joined a company seven or eight years ago and accumulated significant stock holdings.

Would a financial advisor recommend that person keep most of their net worth tied up in one company?

Probably not.

Many of those employees will sell at least a portion of their shares to diversify their finances. That’s completely reasonable.

But it can also create additional selling pressure on the stock.

What About SpaceX?

SpaceX is obviously one of the most anticipated IPOs in history.

I understand the excitement.

The company has built incredible businesses and has changed the aerospace industry forever.

That said, investors should remember that excitement and investment returns are not always the same thing.

At the valuations being discussed, a lot of future success may already be reflected in the stock price.

That doesn’t mean the company won’t succeed.

It simply means that buying a great company at an expensive price can still be a risky investment.

My Approach

My investing strategy has always been relatively simple.

I prefer to invest in companies I understand well and have high conviction will continue growing over many years.

I don’t feel the need to own a stock on day one.

In fact, I’d rather wait, gather more information, and make a decision when the hype has faded and the fundamentals become clearer.

That’s not as exciting as chasing the latest IPO.

But it’s worked well for me over time.

Before buying any IPO, ask yourself one simple question:

Am I investing in the business, or am I investing in the excitement?

The answer may tell you everything you need to know.

That’s a better money decision.