My advice is:
- that you should not buy IPOs at their initial offering price and
- that you should never buy an IPO just after it begins trading at prices that are generally higher than the IPO price.
- The poor performance starts about six months after the issue is sold.
- Six months is generally set as the "lock up" period, where insiders are prohibited from selling stock to the public.
- Once that constraint is lifted, the price of the stock often tanks.
If your broker calls to say that IPO shares will be available for you, you can bet that the new issue is a dog.
- Only if the brokerage firm is unable to sell the shares to the big institutions and the best individual clients will you be offered a chance to buy at the initial offering price.
- Hence, it will systematically turn out that you will be buying only the poorest of the new issues.
- There is no strategy I am aware of likely to lose you more money, except perhaps the horse races or the gaming tables of Las Vegas.
A Random Walk Down Wall Street
by Burton G. Malkiel