IPO Glut Could Portend Bubble Trouble
By Anthony Rhodes
Innovation is the mother's milk of capitalism. There is perhaps no greater manifestation of this truth than the seemingly unlimited amounts of money which is generated by the stock markets' initial public offerings (newly listed companies which begin trading on the exchanges), and the tremendous potential for growth which they represent to the investing public. To become a member of this elite group, each company should exhibit either a propensity to differentiate itself from an already existing set of peers, or become early representations of emerging technological advancements. But the focus on innovation should be at the center of whatever product or service they seek to introduce.
This truth can sometimes become lost during the frenzy surrounding the debuting of these newly issued stocks. In fact, it's neither uncommon nor unheard of for some companies to take advantage of the public's hysteria over their popularity, and to make out like bandits by sidestepping this innovation component altogether.
When such actions occur, we can often find ourselves in the midst of a sectional bubble. And as history has repeatedly shown us, when these fragile frameworks inevitably collapse, they have a tendency to take the entire market down with them.
Sector IPO's follow the same, exact pattern as nearly all growth stories do. They begin with highly innovative companies which establish a benchmark of performance which justifies their often incredible prices, and generally end with not-so innovative "wave riders"; companies who, being fully aware of the excitement generated by their predecessors, time their offerings solely for the purpose of taking advantage of the public's seemingly insatiable appetite for the sectors' offerings. Due to this blinding mania, investors fall into the trap of thinking that all of these new issues are representative of the standards set by the earlier pioneers. The resulting delirium causes many to forego their prudent acts of due diligence, and grab up as many shares as they can, just as soon as they begin trading. This action is textbook definition of an inflationary bubble. Unfortunately, by the time this irrational craze is realized, many investors often awaken to find themselves with a terrible case of buyers' remorse, and regret having had purchased such names at prices many of them will never again reach.
Revolutionary vs Repackaged
If you begin to notice after a while that many of these companies are beginning to look and sound the same, your senses are not failing you. One of the more popular tactics employed by these latecomers, is to package their IPO with similar verbiage and expectations as their forerunners, in an attempt to both align and associate their companies with the successes which their intrepid sector mates rightfully experienced. This should be a surefire sign that the end is at nigh, and that rotating toward safer havens is perhaps, time to commence. When you begin to realize the repetitiveness of this sameness repackaged, follow your instincts and head for the hills. Because there is an increased likelihood that that bubble is very soon to burst.
Mania, in all of its various episodes, has a well-deserved reputation for having the ability to engulf us all. Whether it's the prospect of getting in on the ground floor of an endeavor which is likely to increase our finances considerably, or by being enchanted by a particular cause for which we feel adamant about, its intoxicating allure bars none from potentially being caught in its irresistible orbit, regardless of age, education, or economic status.
Respecting this power is the first step towards developing an immunity to its effects, though it, too, is no guarantee of success. The greatest defense that we can muster, is to be made aware of the alerting signposts while in the midst of its ever-increasing grip. And to hopefully escape its grasp before its powerful fists become clinched.
(Anthony Rhodes is the President and owner of wealth management firm The Planning Perspective www.theplanningperspective.com. Do not reproduce without permission)