3 Things 6-8-26

 Thing One

Why Most Retail Investors Should Avoid IPOs

There is something undeniably exciting about an Initial Public Offering (IPO). The financial media covers it relentlessly, analysts speculate about the company's future, and investors dream of getting in on "the next Amazon" before everyone else.

Unfortunately, for most retail investors, IPOs are often one of the worst places to put money. The first misconception is that individual investors are getting in early. In reality, by the time an IPO reaches the public market, venture capital firms, private equity investors, founders, executives, and institutional investors have often already enjoyed years of growth. Retail investors are not buying at the beginning of the story; they are frequently buying after much of the early value creation has already occurred.

The danger becomes even greater on the first day of trading. Many investors place market orders before the opening bell, believing they will receive the IPO price announced in the prospectus. They rarely do.

The IPO price is generally reserved for institutional clients and select investors who receive allocations through underwriting firms. When trading begins, supply and demand determine the actual market price. A retail investor submitting a market order may find themselves purchasing shares at prices dramatically higher than the advertised IPO price.

Imagine a company pricing its IPO at $40 per share. Retail investors see the headlines and enter market orders before the opening. If overwhelming demand pushes the opening trade to $60 or $70, those market orders may execute at those elevated levels. The investor who thought they were buying at $40 may unknowingly be paying 50% to 75% more than the IPO price before the first trade is even completed.

History provides numerous examples. Investors who rushed to buy shares of Facebook, Uber, Coinbase, Robinhood, Rivian, and many other highly anticipated offerings often paid substantial premiums to the IPO price during the first hours of trading. In many cases, those elevated prices were never seen again for years.

The statistics are sobering. Numerous academic studies have shown that while IPOs often experience strong initial trading pops, their long-term performance tends to lag the broader market. Research examining decades of IPO activity has consistently found that newly public companies, as a group, underperform established public companies over the years following their offering.

The problem is not that every IPO is a bad company. The problem is valuation. The excitement, media attention, and scarcity surrounding many IPOs often push prices well beyond what the company's fundamentals can justify. Investors become captivated by the story while overlooking the price they are paying.

Perhaps the most painful lesson comes from examining what happens after the initial enthusiasm fades. Many IPOs experience declines of 30%, 50%, or even 70% from their post-opening highs. While some eventually recover, the recovery period can be remarkably long.

The reason is simple mathematics. If you buy a stock at $100 and it falls 50%, you are left with $50. To get back to $100, the stock must gain 100%, not 50%. If it falls 75%, your $100 investment becomes $25, requiring a 300% gain just to break even. A 90% decline requires a 900% return. As losses become larger, the road back becomes exponentially steeper.

Facebook is often cited as a successful IPO today, but investors who purchased near its early highs had to wait more than a year before breaking even. More recently, companies such as Uber, Coinbase, Robinhood, and Rivian spent years trading below levels seen shortly after their public debuts. Some remain well below those levels today. Time spent recovering is time that could have been invested elsewhere, compounding in businesses with proven earnings, established track records, and more reasonable valuations.

The irony is that some of the best investment opportunities often occur after the IPO excitement has disappeared. Once the lockup periods expire, insider selling has occurred, quarterly earnings have been reported, and investor enthusiasm has cooled, valuations frequently become more reasonable. The same company that was wildly overpriced during its IPO can become an attractive investment one or two years later.

For most investors, patience is a powerful advantage. Rather than chasing the newest public offering on opening day, it often makes more sense to place the company on a watch list and allow the market to establish a realistic valuation. Let the institutions, traders, speculators, and television commentators fight over the first-day excitement.

Investing is not about being first. It is about being right.

The next time an IPO dominates the headlines, remember that the goal is not to participate in the excitement. The goal is to build wealth. Those are not always the same thing.

One final thought: when an IPO comes to market, Wall Street is largely in selling mode. Founders, early investors, venture capital firms, private equity sponsors, and insiders are all looking to convert years of private ownership into cash. Retail investors should always ask themselves a simple question: if the people who know the company best are eager to sell, why am I so eager to buy?

Thing Two  

Once Upon a Time, Buying a Car Was the Obvious Financial Choice. Is That Still True Today?

For decades, personal finance experts gave a simple answer to the lease-versus-buy question: buy the car. The logic was straightforward. Lease payments never ended. At the end of the term, you had nothing to show for the money you spent. If you financed and purchased a vehicle, eventually the loan would be paid off, and you would own an asset that could be driven for years without a payment.

For a long time, that advice was largely correct. Today's auto market, however, is very different from the one that existed ten or even five years ago. New vehicle prices have climbed to nearly $50,000 on average, monthly loan payments have reached record levels, interest rates remain elevated, insurance costs have surged, and maintenance and repair expenses have risen dramatically. In this environment, the lease-versus-buy decision is no longer as clear-cut as it once was.

Consider a simple example. Suppose you purchase a $50,000 vehicle and finance it over six years. Depending on your interest rate and down payment, your monthly payment could easily land between $750 and $850 per month. After six years, you own the vehicle, but you have also paid interest, insurance, maintenance, repairs, and suffered depreciation along the way. The average cost of owning and operating a new vehicle now exceeds $11,500 per year according to AAA's latest data.

Now compare that with a lease. The average lease payment today is approximately $600 to $660 per month, compared to roughly $700 to $770 for a financed vehicle. Most leases keep drivers inside the manufacturer's warranty period, which significantly reduces the risk of large repair bills and major maintenance expenses.

On the surface, leasing appears to be winning. But the real answer depends on one very important question:How long do you keep your vehicles?

Let's compare two hypothetical drivers.

Driver A buys a $50,000 vehicle and keeps it for twelve years.

For the first six years, he makes payments. For the next six years, he makes none. Even after accounting for maintenance costs, he enjoys years of transportation without a monthly car payment. Assuming the vehicle still has a residual value of $10,000 to $15,000 after twelve years, his long-term economics are extremely attractive.

Driver B leases a similar vehicle and replaces it every three years.

His payment may be lower, and he rarely faces repair bills, but he never reaches the "payment-free" years that create the financial advantage of ownership. Twelve years later, he has made payments continuously and owns nothing.

Under this scenario, buying remains the clear winner. But now let's consider a different type of buyer. Suppose someone trades vehicles every three or four years regardless of whether they lease or buy.

Historically, this person would have been better off buying because vehicle depreciation was relatively predictable and financing costs were lower.

Today, however, the numbers are much closer. A buyer who finances a $50,000 vehicle may lose $20,000 or more to depreciation during the first three years while also paying interest on the loan. The lessee essentially pays only for that depreciation period while avoiding much of the resale risk. In a world of $50,000 vehicles, high interest rates, and rapidly changing technology, leasing has become a much more competitive option than it once was.

There is also the maintenance issue. The average vehicle owner now spends roughly $900 annually on maintenance, with many repairs costing hundreds or even thousands of dollars once a vehicle ages beyond its warranty period. Repair and maintenance costs have increased substantially since the pandemic, while modern vehicles have become increasingly dependent on expensive electronics, sensors, cameras, and software systems.

That means the old advice of "just keep it forever" isn't quite as simple as it used to be. So which option is better today?

For someone who drives 15,000 miles or less annually, wants a new vehicle every few years, values predictable costs, and dislikes repair surprises, leasing is far more attractive than it was a decade ago.

For someone who intends to keep a vehicle for eight, ten, or twelve years, buying still wins decisively. The years without a payment are simply too powerful to overcome.

In other words, the answer has shifted. It is no longer true that buying is always the financially superior decision. Instead, the better question is whether you are the type of person who actually keeps cars long enough to benefit from ownership.

If you are going to replace your vehicle every three years anyway, leasing may no longer be the financial mistake it was once considered.

If you're willing to drive a vehicle well beyond the loan payoff date, buying remains one of the most effective ways to lower your long-term transportation costs.

Thing Three

Just A Thought  

"Happiness is reality minus expectations." - Tom Magliozzi