Facebook’s initial public offering (IPO) in May 2012 left a bad taste in many an investor’s mouth after allegations surfaced that institutional investors—and not individual investors—learned beforehand that the much-hyped IPO would generate weaker-than-projected revenue. It’s illegal for institutional investors to get information that the public doesn’t have.
We asked two financial experts how typical investors can protect themselves during future IPOs. Unfortunately, they had no clear answer. The reality of it is that most IPOs tend to be losers, at least at first, says Bill Middleton, who is president of Sound Portfolio Advisors.
Institutional investors often hear rumors first, because they are entrenched in the investment landscape and have staff members who track down every snippet of information, says Bill Logue of financial-planning company Clear Focus.
Logue recommends that before you invest in an IPO, you should consult a financial adviser, who typically will charge you a fee of about 1 per-cent of your transaction and who can tap into institutional money managers’ knowledge. (Individuals can’t invest directly with institutional money managers, but many financial advisers follow these managers’ decisions closely.)
Piling onto an IPO just because you’re a fan—as many Facebook users apparently did—isn’t a sound investment strategy, Middleton says. The old advice still applies: Don’t buy a stock based on emotion.