I bought a stock when it went public last year. A major brokerage house was the underwriter and had a $30 price target on the stock. I thought it was a good idea to buy the stock at $18 because I thought it would go up to $30. The stock, as of yesterday, was trading below $1. How can a brokerage get it so wrong?
Did the analyst, a professional, not do due diligence before issuing such a high price target to the public? It seems that they have set a high price target to generate interest in the IPO. Is it ethical? Granted, other firms also cut their price targets on the stock by a lot, but the underwriter’s target was the highest. I feel like some “sucker” is buying it so high.
The underwriter wants to make money. Management wants to make money. Brokers want to make money. And investors want to make money. Everyone’s name in a hat is for the same reason. Not everyone wins. And, sometimes, everyone loses. (I removed the name of the brokerage house and company from your letter, and read the company’s description of its services, and I still have no clue about what it does. I trust you have a better idea.)
It’s a game of chance, and no one, as any IPO prospectus will inform you, can predict the future. That’s why before going public, companies warn investors that the stock could go down or go up, the company could go out of business, and a myriad of other potential disasters. You buy at your own risk, and major brokerage houses — even those that were underwriters for IPOs — often cut their own price targets for stocks, as happened in this case.
The analysts who underwrote the IPO, and wrote the initial investor report prior to the IPO work on the “buy” side of the brokerage. Analysts are on the “sell” side, evaluating a company’s financial results, competitors, management prowess and other corporate plans following an IPO. This is the brokerage side of an investment bank, and these analysts are expected to arrive at their own objective views, regardless of an investment bank’s role as underwriter.
Every investor wants to get in on the ground floor of the next Tesla TSLA,
or Apple AAPL,
or Netflix NFLX,
or Amazon AMZN,
In his book, “wall street waltz“Wealth manager Ken Fisher has a very direct, if refreshingly blunt, explanation for your dilemma.” IPO stocks often go up immediately because the brokers selling them are getting sales commissions of several percent for their promotion. , so they create a lot of mindless momentum around these issues,” he writes.
,‘Looking at an investor who has made a fortune on an individual stock is like hearing someone who wins an Oscar say you can manifest your fortune and not give up on your dreams.’,
“Investors get sucked in by the excitement and the dream of a big hit,” Fischer said. “And they usually get hit, because companies raise money through stock offerings only when the price is too good for them — which is too high on average to be a good deal for buyers. Soon The hype wears off and stocks plummet. The age of the metaverse and social media hasn’t changed that. How would I know? Fischer wrote these cautionary words a year before the 2008 financial crash.
However, investors often complain about the opposite problem: IPOs are often underpriced and this issue is one of the most widely studied anomalies in equity markets. this recent review looked at a large body of research on the subject, and concluded that companies seek to raise funds as well as raise their profile, and concluded that the low price is due to “information asymmetry”. In plain English, it refers to one or more parties having more information than others.
“Some investors are more informed than others. In other words, they have a better sense of the quality of firms than firms that are undervalued or overvalued,” wrote author Kailai Wang. Her other findings are your case for an overpriced IPO. Can also apply to: “Due to the scarcity of capital, it is believed that the stock market is not filled by fully informed investors. The IPO should be set at a low price to keep less informed investors within the market.
Investing in individual stocks is a fool’s game, unless you bought Apple 40 years ago at $22 a share. But even those who did and told you that success could be achieved by buying an individual stock (a) probably bought the stock long ago, (b) held onto it for the long term, and (c ) be lucky. Watching an investor who has made a fortune on an individual stock is like listening to someone who wins an Oscar say you can manifest your fortune and not give up on your dreams.
They believe it because they’ve done it, and they want you to believe you can too. Sure, some people find it a lucrative side hustle to promote the theory of becoming rich and famous by reverse engineering their own good fortune and selling it to the public. He writes books about how to get rich (quickly), gives TED talks about how to get rich (quickly), and appears on his own television show about how to get rich (quickly). But remember: Even Warren Buffett makes mistakes.
It’s easy to get rich slowly through real estate, compound interest and saving for retirement. If you decide to hold this stock, call me in 40 years.
yoYou You can email The Monetarist with any financial and ethical questions at [email protected], and follow Quentin Fottrell Twitter.
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