Shownotes
IPO (Initial Public Offering) investing sounds thrilling, but the data tells a very different story. On this episode of Metcalf Money Moment, Jeb, Ethan, and Eric explain why buying a stock on IPO day, from SpaceX to Meta and Uber, often leads to painful drawdowns for everyday investors. They discuss behavioral finance, the fear of missing out, and why dollar cost averaging may beat chasing hype. Diversification and a solid financial plan help protect your portfolio from IPO volatility during those early, unpredictable months. Should you buy a stock on IPO day? This episode helps you decide before you invest your hard-earned money.
What you will learn in this Episode:
✅ Why the average IPO jumps 19% on day one of trading, then can face a brutal drawdown of over 50% within the first year on the market.
✅ How behavioral finance and fear of missing out drive herd mentality around hyped up IPOs like SpaceX, Meta, and Uber.
✅ Why diversification and a strong financial plan matter more than chasing the next hyped up stock market debut with your retirement dollars.
Tune into the Metcalf Money Moment podcast for expert insights on wealth management and retirement planning! Join Jeb, Ethan, and Eric for practical Estate Planning strategies that you can implement to unlock financial clarity and confidence. Listen now to inspire your financial journey!
TIMESTAMPS:
00:00 The question: Should you buy an IPO on its very first trading day
04:51 What the IPO investing process actually is and why companies choose to go public
10:02 Behavioral finance, herd mentality, and the SpaceX IPO frenzy in real time
14:54 Financial planning perspective on diversification and protecting your portfolio from IPO risk
16:12 Why dollar cost averaging beats trying to time a hyped up stock market debut perfectly every time
18:37 Closing thoughts on patience, long-term investing, and lessons from the Amazon stock story
KEY TAKEAWAYS:
💎 Nearly two out of three IPOs underperform the broader stock market over the following three years after going public.
💎 Dollar cost averaging into a quality company over time often beats trying to time the IPO day itself perfectly.
💎 A solid financial plan and diversification protect your retirement savings from sudden IPO volatility and market hype.
DISCLAIMER:
This information is not intended to be a substitute for specific individualized tax or legal advice. We recommend discussing your particular situation with a qualified tax or legal advisor.
RESOURCES MENTIONED:
Metcalf Money Moment, Jeb Graham, Ethan Hutcheson, Eric Wymore, Estate Planning, IPO Investing, IPO, Initial Public Offering, Stock Market, SpaceX IPO, Behavioral Finance, Dollar Cost Averaging, Diversification
Transcripts
Now your hosts[00:00:30]
Jeb Graham: [:Ethan Hutcheson: Morning, guys. Good morning. Doing well.
k maybe today we could start [:But, so if you had the opportunity to buy the [00:01:00] next Amazon, Apple, or Nvidia on the very first day that it became [00:01:05] public, publicly traded, would you do it? [00:01:10]
Ethan Hutcheson: Is this a trick question?
d you do it or wouldn't you? [:Ethan Hutcheson: I'm gonna refrain from answering that
Jeb Graham: question.
There you go. Well-
Ethan Hutcheson: Plead
raham: the Fifth ... I guess [:So, and I think this is a very timely [00:01:35] topic right now because people have referred to this as the summer of IPOs, [00:01:40] probably the biggest summer that we've had in IPOs, uh, or biggest year we've had in IPOs in a very long [00:01:45] time. Everyone's talked about SpaceX that just, uh, obviously IPO'd a [00:01:50] month ago. We have Anthropic and we have OpenAI that are slated to go public.
So [:And I'll tell you what, every time we go [00:02:20] through this, as financial advisors, we have clients and I, you know, if I was a client, I would too, right? They call in and they [00:02:25] say, "Hey, I wanna be able to get in on this. This is a company I believe in. This is a company I use." And [00:02:30] so, uh, and I think there's a big thought process out there that this one's different, right?
Like this one's [:But- One av- uh, interesting stat is that the average [00:03:00] IPO goes up 19% on its first day of trading. Okay, [00:03:05] so you think about that. SpaceX was a, was a great example of that. It becomes public and [00:03:10] immediately because of all the public sentiment, so what this does is it creates tremendous excitement, [00:03:15] makes investors feel like they missed out if they weren't allocated shares.
Uh, so, uh, [:Is that [00:03:35] many major IPOs experience a very large drawdown during the first year. So one [00:03:40] study found that the average maximum decline from peak to trough is [00:03:45] 55% during that year. So think about that. The IPO comes out, it goes up 19% [00:03:50] that very first day, and then sometime in that, in this next year, it goes down [00:03:55] 55% from that high, right?
And then, uh, um, and by the [:Okay? So you think about the broader market, S&P 500, two [00:04:25] out of three IPOs underperform that over the following three years after their IPO. So [00:04:30] the questions become is, why does this keep happening? Why do smarter investors [00:04:35] continue to chase IPOs? And is buying a great company [00:04:40] automatically a great investment?
e of the excitement from the [:Eric Wymore: Yeah, absolutely. So, yeah, let's start with the [00:04:55] basics. I mean, so an IPO, it's, it's an initial public offering, so it's the [00:05:00] first time that a privately owned company offers shares to the public through a stock [00:05:05] exchange.
rship is just limited to the [:Uh, there's, there's several reasons, but I think [00:05:30] one of the biggest reasons is it, it gives them, you know, reas- or gives them access to [00:05:35] capital. So for example, the company is able to share, to sell a [00:05:40] portion of their company, and it raises quite a bit of cash. That's the one time the [00:05:45] company actually receives the money.
ctually receives money for a [:[00:06:10] Um, you know, and, and, and you kind of go back into that excitement, you know, and [00:06:15] what Wall Street is doing, and they're creating that excitement because they [00:06:20] have a series of underwriters or big investment banks that go around and do kind of a dog and pony show [00:06:25] and, and explain to, to, you know, to, to every investor, every institutional [00:06:30] in-institutional investor why this is the next greatest company that they need to put their money into, [00:06:35] and it drives that price up.
now, that excitement. And so [:Um, and the [00:07:10] reason is because those investment banks will take, you know, the, the [00:07:15] show on the road to larger clients, institutional funds, [00:07:20] uh, big, big, uh, investors. And by the time it gets [00:07:25] all the way trickled down to the individual investor, that means that some of those large [00:07:30] investors, uh, institutional investors decide to pass on that IPO.
d of a little bit of a catch [:You know, [00:07:50] Facebook, which is now called Meta, you know, they went public in 2012, and [00:07:55] huge expectations, uh, for that one. Yet, you know, at... shortly after the [00:08:00] IPO price, it dropped over 50%. And, you know, it took [00:08:05] a few years of recovery, and obviously now, [00:08:10] you know, it's one of the largest companies that we... that, that's in our stock market.
Um, it's a big driver of [:And it took a while, uh, before it became confident in its [00:08:45] long-term purpose and its ability to, to drive returns. And, and I think, you know, one [00:08:50] final example is Rivian. And, you know, during the, you know, the electrical vehicle [00:08:55] boom, uh, that's happened and kind of goes in cycles as well, uh, it was offered and, [00:09:00] you know, good company, just, you know, the share price dropped over 80%.
And it's taken a [:So, [00:09:30] um, again, I think it's... You know, I always say it's, you know, price is what you pay, value is what [00:09:35] you get. And I think that's something when you're considering an IPO, I think you need to have a, [00:09:40] a very long-term, uh, view on it and, and realize that maybe the [00:09:45] best thing to do is just kind of sit out for a little while and let that trade kind of happen and that movement [00:09:50] kind of happen before you jump in.
have, you know, our emotions [:Ethan Hutcheson: Yeah ... [00:10:00]
Eric Wymore: behavioral issues.
coin it the eighth wonder of [:Everyone kind of treats, [00:10:10] treats things differently. And when we think about IPOs, I'm going to talk a lot about SpaceX. I don't mean [00:10:15] to single them out, it's just the most recent one. A-and it's, it's, uh, there's a lot more [00:10:20] IPOs that are going to happen over the course of the next two to three years, um, that are probably going to have a lot of the same [00:10:25] characteristics.
l those things that are, uh, [:So there was a lot of hype [00:11:00] around it. Um, there was, uh... You know, I remember on local news, I was turning on, you know, [00:11:05] KCTV5 here in Kansas City, and the local news was even talking about SpaceX. So [00:11:10] it was, it was very, um, I don't want to say over-hyped yet, because we don't know, it's [00:11:15] very early on. But there was a lot of people talking about it, which brought the herd [00:11:20] mentality around that specific IPO.
Um- [:So, um, leading up to that, y- you think about it, and you think about your own [00:11:45] portfolio, and you're like, "Man, I need to buy some SpaceX," because everyone's talking about it. It's gonna go to the [00:11:50] moon. You just have this preconceived notion on what the stock's gonna do, and the reality of, of the, you know, the [00:11:55] last 20 IPOs that we could, we could run off, you don't know what's gonna happen.
The a- like Jeb said at the [:And, and [00:12:20] when you think about kind of behavioral finance, you know, when [00:12:25] everyone's talking about something, you should be contrarian a little bit and, and think about it a little [00:12:30] harder, and just be a little more careful, uh, when, when you're, you're looking to allocate some of your [00:12:35] hard-earned retirement dollars or play money, whatever have you, into investment like that.
Coming off [:So, thinking about SpaceX [00:13:10] and putting dollars to work early, um, is definitely a risk. And, and when [00:13:15] we, we've talked to clients, um, you know, at the end of the day, if, if you wanna have that in [00:13:20] your portfolio, we can get it in there. There, there's, there's, there's not, you know, hesitations or anything like that.
But what [:So you can [00:13:45] see, even in the first month of trading, there's extreme amount of volatility that can occur. [00:13:50] Now, that can taper off towards the end of the year, and it can go up, it can go down. You know, who knows what that's gonna look like. [00:13:55] But over time, when you're, you're... When these things get hyped up so much, there's a [00:14:00] lot that occurs in those first five trading days of the IPO that can, can really [00:14:05] determine, you know, where that stock's gonna go over the next 12 months.
And taking a step back, [:Think about how it fits into your [00:14:25] portfolio before you just go and, and dive all into that. So I think, again, to kind of wrap things up, the [00:14:30] behavioral concept or the behavioral finance piece of, of IPOs is very tricky. 'Cause, you know, [00:14:35] like Jeff said, if you're gonna buy Amazon the day it started, it's a great investment, right?
But it still [:Jeb Graham: [00:14:55] Absolutely. Um, and, and to piggyback on that, you know, if we're, if we're gonna take this from a [00:15:00] financial planning perspective, right?
ay, "Hey, I want to buy this [:Right? If it, if it doesn't work out, we lose money [00:15:30] on this investment. Does this mean that we have to alter our plans, r- either retire later, uh, [00:15:35] we're not gonna leave the amount of money we want to to our beneficiaries? All those sorts of things. I think that's something [00:15:40] that you gotta keep in mind. And then I think the other thing is, is we always wanna keep [00:15:45] diversification in mind, right?
hat is, is, you know, if you [:Um, so I think from that planning perspective, that's [00:16:15] the first thing that we want to do, is, is keep that in mind. So the other [00:16:20] thing is, is, is I would say being first- isn't always the best, right? May- [00:16:25] being first to the game is not always best. And I'll just give you my own perspective and things that I've done [00:16:30] over time, because some of these large names that we've talked about today, um, you know, I've owned [00:16:35] in my portfolio, right?
e, I didn't buy all of it at [:Well, maybe that's the [00:17:00] time to buy a little bit of a chunk. So you think about dollar cost averaging and maybe buying small [00:17:05] increments at certain times I think can be a really good, uh, way to get invested in a company [00:17:10] over time. And what I'll tell you is if a company is a quality company on the day that it [00:17:15] IPOs, it should be a quality company six months later, 12 months later, and [00:17:20] 18 months later as well.
d of the emotions of fear of [:So, [00:17:40] but you know, other than that, I think, I think always keeping the plan in [00:17:45] mind when you're thinking about buying an IPO, uh, is important. Just don't do anything that's gonna [00:17:50] derail the financial plan. And by the way, if you hit a home run, that's awesome, you know? And, and might [00:17:55] you look back and say, "God, I wish I would've bought, you know, $100,000 of that instead of [00:18:00] $50,000 of that"?
know, ba- what do they say? [:So, um, but [00:18:20] that's just kinda the thought process from a, from a planning perspective. So, uh, but I, [00:18:25] I'm glad we talked about this today 'cause I think, number one, we've had a lot of clients calling in asking about [00:18:30] IPOs, and, uh, I think this is a good way to just kinda talk about them broadly. And, um, [00:18:35] so any other closing thoughts, guys?
ose hope on it yet. That, I, [:Jeb Graham: Yeah. I mean, if you would've bought Amazon on the opening day, uh, [00:18:55] you'd, you would've made your money back in many, many multiples, right? But it's, the problem is, is what [00:19:00] happens is people do that, and then it goes way down, and then they sell it, right? Because they're worried about... [00:19:05] They have emotions.
They're worried about volatility and all those things, so.
Eric Wymore: You know, [:Ethan Hutcheson: Yeah. The same life [00:19:20] lessons I'm trying to teach my five-year-old now, you know?
hare, right? You know, that [:Jeb Graham: That's right. So [00:19:30] awesome. Well, guys, this has been productive, and this is Metcalf Money Moments podcast signing off.[00:19:35]
Voiceover: Thanks for [:Disclaimer: Jib Graham, Ethan Hutchison, and Eric Wymore are [00:20:05] registered representatives with and securities offered through LPL Financial, member FINRA SIPC. Investment advice offered through [00:20:10] WCG Wealth Advisors, a registered investment advisor. WCG Wealth Advisors and Metcalf Partners Wealth Management is a [00:20:15] are separate entity, entities from LPL Financial.
information only and are not [:All performance referenced is historical and is no guarantee of future results. All [00:20:30] indices are unmanaged and may not be invested into directly