When a high-profile company like Twitter goes public, there’s naturally a lot of interest in whether or not you might want to buy in. And the appeal is clear. Twitter isn’t yet a profit engine. But it’s achieved a really fundamental role in the global communications infrastructure. And with a user base that’s still considerably smaller than Facebook’s it has a ton of organic growth potential. Nobody really knows how much revenue per user Twitter can feasibly attract, but people really love the service and it seems to grow more and more embedded in our lives with every passing month. It’s easy—very easy—to sketch out scenarios in which the company’s current valuation in the $10-$20 billion range end up looking pathetically low in one or five or 10 years.
And if you’re not an “accredited investor” with more than $200,000 a year in income or over $1 million in non-housing assets, this is your first and best chance to get in on the ground floor.
But in all seriously, you do not need five tips for investing in IPOs. You need one top for investing in IPOs. The tip is—do not invest in IPOs.
Or at least if you do, do it for the entertainment value. I was in Las Vegas recently and I played some blackjack. I lost a bunch of money. Around me at the table were some other folks and they were losing money, too. And of course the table was in a sea of other tables all full of people losing money. There’s nothing wrong with losing money for fun, and if you had some money set aside to play blackjack with but you think it would be more fun to invest in a Twitter IPO then by all means knock yourself out.
But forget about tips. “Always read the prospectus,” for example. You know who else is going to read the prospectus? Everyone. The game with stocks isn’t to buy companies that have a promising business outlook, it’s to buy companies whose outlook is better than the other players in the marketplace realize. Your odds of outsmarting the collective judgment of everyone else who’s putting time, money, and effort into assessing this are very low. Perhaps not as low as your odds of winning at blackjack. But as an investment strategy, you shouldn’t worry.
This is also why normal people shouldn’t worry too much about this JOBS Act “confidential” IPO business. Reduced pre-IPO financial disclosure is a disaster for journalists who are losing access to a bunch of facts and figures that it would be interesting to write stories about. But the idea that this kind of investor protection rule would actually help small investors play in the IPO market is silly is a bit like strapping on a football helmet before driving your car into a cliff. The right answer is just stay out of the damn car.