Patience Over Publicity: What Mega IPOs Teach Us About Investing

Every few years, financial markets become captivated by the next highly anticipated initial public offering (IPO). Billion-dollar valuations, extensive media coverage, and predictions of transformational growth create an understandable sense of excitement. Investors often ask whether they should own these companies right away to avoid missing out on the next record breaking company.

Substance Behind the Shine?

While mega IPOs generate compelling headlines, they have historically produced surprisingly underwhelming returns in their first year as publicly traded companies. On average, IPOs have delivered negative monthly returns in the first twelve months 40-80% of the time since 2000. Even among recent IPOs that ultimately posted positive one-year returns, the journey was rarely smooth and on average underperformed similar companies by about 3%.

Why does this happen?

Part of the explanation lies in the structure of the IPO process itself. When a company first goes public, only a portion of its shares are typically available for trading. Over time, lock-up periods expire, allowing founders, employees, and early investors to sell previously restricted shares. As this additional supply enters the market, selling pressure can outweigh demand, often placing downward pressure on prices as the market works to establish a more accurate valuation.

This dynamic serves as an important reminder that an exceptional business is not always an exceptional investment at every point intime. Price matters and allowing markets time to absorb new information frequently leads to a more efficient assessment of a company's value.

Impact on Indexes

Another common misconception is that newly public companies immediately become meaningful holdings within diversified portfolios. Inclusion in major market indexes is a gradual process influenced by numerous factors, including the number of publicly available shares, market capitalization, liquidity requirements, and the specific construction rules established by each index provider.

Although market indexes are often described as "passive," their construction involves many subjective, rules-based decisions. Index providers determine which companies qualify for inclusion, when they become eligible, and how much weight they receive.

An intentional portfolio construction process better serves long-term investors. Rather than purchasing new company shares during periods of heightened enthusiasm, a flexible approach allows portfolios to gain exposure after markets have had time to digest new information. By allowing time to determine the appropriate allocation to a new company, portfolio managers can more thoughtfully choose if and when to purchase shares.

Building Portfolios with Staying Power

Our investment philosophy is not built around identifying the next company to dominate financial headlines. Instead, we focus on constructing globally diversified portfolios designed to capture long-term expected returns. While innovation remains an important driver of economic growth, history suggests that consistently chasing the newest opportunity has rarely been a reliable investment strategy.

Instead, we continue to emphasize areas of the market that have demonstrated persistent return premiums over long periods of time, including value stocks, small company stocks, and companies that we find to have strong profitability. These return premiums have historically rewarded patient investors with more consistent performance in various market environments.

The next great company will eventually become part of the public markets. Over time, it will likely become part of diversified portfolios as well. The challenge is not identifying it on the first day it trades but maintaining the discipline to invest according to enduring principles rather than temporary excitement.

In investing, patience is rarely as exciting as the headlines. But over the long run, it has proven to be considerably more rewarding.

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_{Disclosure: Grand Wealth Management is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Grand Wealth Management’s investment advisory services can be found in its Form ADV Part 2and/or Form CRS, which is available upon request.}

_{Past performance is not indicative of future results. There is no guarantee of the future performance of any Grand Wealth Management portfolio. All investments involve risk, including loss of principal and there is no guarantee that investment objectives will be met.}

_{The opinions expressed are those of Grand Wealth Management. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed.}