Okay, maybe it’s a bit about the Facebook IPO … but bear with me.
Over the past 80 years, an important relationship has held: small stocks (as measured by a company’s market value) do better than big stocks, and “value” stocks (basically, unloved stocks) do better than “growth” stocks (think “hyped-up” stocks like Facebook). Over long periods, the difference has been more than 4% per year. This relationship doesn’t hold up every year, but it does over long periods. The fund manager I typically use — Dimensional Fund Advisers — uses this relationship as one of their core investing tenets. Their funds have done very well as a result.
The science of behavioral investing sheds interesting light on this topic as well. Studies show that individuals tend to over-value companies they know, to prefer stories over facts, and to prefer investing with the crowd, because it gives them a feeling of “security” they cannot get as a contrarian. Does that sound like any recent IPO?
Finally, Dimensional’s analysis shows that, on average, IPOs under-perform the market.
No, I did not predict the Facebook offering would be a flop, and I have no idea whether the company’s shares will, in the end, prove a good investment for anyone other than its founders. (I didn’t buy into the IPO because I buy diversified mutual funds, not individual stocks.) But I know what the averages say. You are best advised to broadly diversify, to think long-term, to over-weight modestly toward small / value, and to invest in a cold, analytical fashion … based on facts, not stories. There’s nothing wrong with using a bit of your net worth to bet on a hot IPO or to look for the next Google. Just don’t do it with the money you need for retirement. After all, you want to stay your own best friend.