Two Downer Notes For Popular Investments

PARIS, FRANCE – FEBRUARY 26: In this photo illustration, the Coinbase cryptocurrency exchange logo … [+] (C) is seen on the screen of an iPhone on February 26, 2021 in Paris, France. Cryptocurrency trading platform Coinbase has filed for registration with the SEC on Thursday for an IPO via direct listing on the Nasdaq and will likely be the largest IPO of the year. Coinbase reported $ 1.28 billion in revenue in 2020 (+ 140% year on year), for net profit of $ 320 million. (Photo illustration by Chesnot/Getty Images)

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There’s always investing advice aplenty on social media. What people forget is that often pushing the suggestion are either personal financial interest — they want their investments in something to go up from more popular demand — or belief in what they’ve heard via rumor over the years.

Here are two areas where you ought to be careful especially given recent information and lessons. Not that all investments in any of them are bad, but there are plenty of reasons to tread carefully and only put invest what you can afford to lose.

Crypto

There are people who have made fortunes in trading cryptoassets. Then again, there are many who have lost their shirts in the recent luna/Terra meltdown, as MSN reported:

“The coin’s price fell from $116 in April to a fraction of a penny at the time of writing. Such an implosion has been seen in small-cap memecoins in the past, but never for something the size of luna, which had a market cap of over $40 billion just last month.”

Some extreme fans of cryptocurrency like to say that it’s the future of money and that fiat currencies—the ones like the U.S. dollar, Euro, Japanese yen, and British pound—have no inherent value. And that is correct. Value is always matter of perception, whether talking of aper money, gold bullion, or the electrons captured by a blockchain.

But gold, whether rationally or not, is highly prized. Fiat money rest on massive economies and, ultimately, the collective resources of nations. There is long-established trust, even though sovereign currencies can and have collapsed. But it takes a lot for that to happen.

Cryptocurrencies can be wildly volatile. Bitcoin BTC is down by more than half of its heady pricing in November 2021. Was it overvalued then? Maybe. Undervalued now? Maybe. But it’s hard to tie to a solid value because it, as other cryptocurrencies, depends on people continuing to buy to push the price up.

As Tracy Alloway wrote in Bloomberg, “Many of these tokens derive their value from an influx of new money rather than an underlying cashflow, so incentivizing new users into the ecosystem is paramount, and that means you need to deflect attention from the many who have lost their shirts.”

When someone suggests that you put everything into crypto, give some thought as to whether they need to see others doing so to help make sure their investments don’t fall.

IPOs

IPOs can be a way to make money if you’re an insider. That is, you’re one of the founders, one of the early employees, one of the big investors, or one of the prized customers of a bank underwriting the IPO.

Those with shares, especially the investors (employees are usually legally tied up and prevented from selling shares when a company first goes public), can make significant money when the company goes public and they can sell shares through exchanges. But making money requires one thing: people willing to pay more for a position than the IPO price. Without a differential, there’s no immediate profit.

That lack of a differential is what made so many people angry about the Meta (formerly the company known as Facebook) IPO. Many people wanted to own some of the company. The valuation went nuts, hitting 100 times its earnings and dwarfing the multiples that Apple AAPL and Google GOOG had at the time. So, the stock jumped only 0.6% over the offering price, as CBS News reported at the time. And that was fine. Jim Cramer said, “In all my years on Wall Street this is the most outrageous and egregious deal I have ever seen.” Instead, consider that it was one of the few times an IPO wasn’t an egregious deal designed to pull money from the average person at inflated prices.

In early May 2022, Manhattan Venture Research released an analysis of tech IPO investing. Here are some of the points:

· “At the 6-month post-IPO mark, pre-IPO investment returns beat post-IPO returns by a wide margin. Buying IPOs on the open market has produced lower returns.”

· “Later-stage pre-IPO investments outperformed early stage pre-IPO investments.”

· Depending on their timing, early investors saw annualized returns of anywhere from 62.5% to 112.9% on opening day and 53.0% to 82.8% after six months. At six months, those buying on the opening day had annualized returns of 1.6%.

You’re not supposed to make money buying IPOs when they hit the market. You’re supposed to enable insiders to make money.

Don’t get carried away by the hype. Wait and treat it like a regular stock, because it is.