Jumping Off a Cliff: Investing in the Twitter IPO
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Unless you’ve been living under a rock lately, you know there has been all sorts of buzz about the Twitter IPO the last few weeks. On one hand, why wouldn’t there be? It seems as though everyone is on Twitter so why wouldn’t you not want to get your hands on some shares during their Initial Public Offering of stock? While there could be opportunity in the future, it is my belief that investing in the Twitter IPO would be as effective as taking a running jump off a cliff and hoping not to hit bottom.
Investing By Throwing Darts
Investing in an IPO, many times is simply like throwing darts at a board to decide on your investing decisions. The basic fact is that few know (at least amongst the retail investors) how an IPO will perform even though there might be a ton of excitement around them like is the case with the Twitter IPO. The problem with that is that it can lead to significant losses when it comes to investing.
Speaking personally, Mrs. Frugal Rules wanted me to invest in Groupon the day it went public. She loved (at the time at least) their product and wanted to invest in them. Against my better judgment I put a little bit of money in to Groupon the day it hit the markets and after a very brief pop it sunk like a rock. I got in at $28 per share and it quickly moved against us. Thankfully it came back up for a bit and we got out at $24 per share. It wasn’t a huge loss by any means, but it provided a valuable reminder to do homework before investing.
Another big problem I have with the Twitter IPO is their efforts to take advantage of a law that allows them to limit how much information they have to provide…um…Red Flag anyone?!
The Numbers Aren’t All Bad for Twitter
Certainly, if you’re interested in investing in the Twitter IPO, the numbers for Twitter can’t be all bad, can they? No, they’re not all bad, as according to an article I read on Yahoo Finance recently. Here are some of the numbers on Twitter:
- There are more than 200 million people actively tweeting worldwide (20% of those on Facebook)
- They’re having good subscriber growth – 35% in the States and 47% around the world
- They’re spending upwards of 40% on research – which could be good or bad
One of the glaring problems with the Twitter IPO though is that they’re losing money, in fact they’re on pace to lose $140 million this year alone – which is on the lower end they’ve had in losses year over year. While I have read that they have good inflows of cash from investors, they’re still losing money at a pretty high rate over the long term. This may not be a problem right now, but many big investors won’t stick around if Twitter continues to lose money every year.
Not Everyone Will Be Able to Invest in the Twitter IPO
When I worked in the online brokerage industry I always hated it when a company with a lot of buzz was going to have an Initial Public Offering and the Twitter IPO is right up there. It brought out all the crazies thinking they could jump in to the IPO and make money hand over fist. When I explained the IPO guidelines we had as an institution, many investors would either get upset or deflated when they saw their hopes of getting rich quick were dashed. As a general rule, most brokerages have guidelines for who can invest in an IPO and they vary from institution to institution. Following are some of the requirements a person must meet to invest in an IPO:
- An account value of at least $50,000. That’s really on the low end as many require balances in the range of $100,000 to $250,000
- Specific investment objectives
- Generally can’t sell the shares right away or risk not getting future IPOs
Beyond all that, many investors don’t realize that most brokerages will give out their IPO shares via a lottery system and thus not even guarantee shares or risk getting less than you wanted. That said, the system is, to a certain extent, not really friendly to allowing retail investors to invest in an IPO and the Twitter IPO will be no different.
Don’t Join the Masses When it Comes to Investing
What underlies the craze over the Twitter IPO for me is the tendency of investors to follow the masses when it comes to their own investment portfolios. The sad fact is that many amongst the masses are simply uninformed and only go off of what they hear amongst the financial “noise.” Taken to an extreme, that can be a very dangerous game to play with your retirement investing and can lead to headaches.
Do I think there’s an excitement surrounding the Twitter IPO? Sure I do. Do I like reading about it? Yes. (I am geeky that way) However, you have to think with a clear head when it comes to your investing and following the masses will (generally speaking) will only betray what you likely want to accomplish with your investments.
As of right now, we don’t know the exact date of the Twitter IPO (though it appears to be sooner rather than later and supposedly in the next few weeks) or what the exact Twitter IPO price will be, though we have some educated guesses. My suggestion in regards to the Twitter IPO is to avoid the “noise” and simply enjoy the fodder it is. If history is any guide with stocks like Facebook we’re likely to see a good decline before truly knowing if Twitter is a stock worth investing in. For those who think that there is considerable money to be made in the Twitter IPO, I would argue that much of the money out there has already been made by private investors prior to Twitter going public.
What are your thoughts on the Twitter IPO? Will you be trying to invest in Twitter the first day it hits the market, or will you be holding out?
Photo courtesy of: John Rawlinson