Wall Street's Latest "Shell Game"

By Matthew Milner, on Wednesday, October 28, 2015

The market’s had a great run recently:

Since bottoming out in 2009, the Dow has more than doubled.

To celebrate, Wall Street’s been partying like it’s 1999.

But now the end is in sight.

How do we know?

Because you and all your friends just got invited to the party.

The IPO Party

During the boom of the 90s, investors of all stripes—from individuals like you, to institutions like Fidelity—would beg to get IPO shares.

Thanks to a surging market, these shares were like free money:

MarketWatch, for example, rose 474% in its first day of trading...

Globe.com jumped 606%...

And VA Linux popped 697.5%.

Who wouldn’t want to get into a money-making party like that?

Going Negative

But recently, the returns from IPO investing have gotten downright dismal:

Facebook, for example, was expected to be the hottest IPO in recent history—

But at the end of its first day as a public company, it was up just .6% (and in the following months, it dropped by nearly 50%).

Even worse, according to data from Renaissance Capital, the average IPO in 2015 has provided a negative return on its first day, falling 3.5%.

So when we read the news last week that JP Morgan and a company called Motif would be inviting ordinary investors like you into “big-name IPO transactions,” perhaps you’ll excuse us for being less than enthusiastic.

The Velvet Rope Opens—But What’s Inside?

Motif is an online broker founded in 2010.

It gives investors like you an easy way to buy baskets of stocks centered around themes—from “Dogs of the Dow” to “Social Networking.”

Recently, Motif and JP Morgan decided to team up on a new business venture:

They’re allowing investors on Motif to get access to IPOs led by JP Morgan.

But with today’s weak post-IPO performance, they must certainly be aware that investors like you aren’t likely to profit from this venture.

So why would they do it?

The Truth from The Wall Street Journal

Banks like JP Morgan are under enormous pressure to create demand for their IPOs.

If they can’t place shares with investors, they’re often forced to buy the stock for themselves.

Concerned about a lack of demand from sophisticated investors, they came up with a strategy to ensure their own profits:

They’d sell these shares to ordinary investors—investors like you who’ve been tricked into thinking that IPOs still create big profits.

Last week, The Wall Street Journal called out the risks of such a strategy:

“[These deals] bring the smallest investors into the market at a time when the shares of companies often fall after they begin trading.”

What Happened to IPO Returns?

To understand why IPO profits disappeared—and to learn where you can go to reclaim them—let’s look at three major trends:

Trend #1: Staying Private Longer – In the year 2000, the average amount of time between a company being founded and going IPO was 6 years; today, that number is closer to 10 years.

Those four extra years allow a company to build its business—and allow it to increase its market value dramatically.

Privately-held Uber, for example, is six years old and is already worth an estimated $60 billion. In markets of old, Uber would have gone public years ago…

But in today’s market, its founder is resisting pressure to go public anytime soon.

Trend #2: Raising More Money in the Private Markets – Instead of tapping public markets for capital, companies are now tapping the private markets.

From massive private hedge funds like Tiger Global to global mutual fund companies like Fidelity, some of world’s biggest investors are pulling back on their public market investing in favor of private market investing.

In the past year, for example, Tiger has raised two separate $1.5 billion funds to back private companies such as home furnishing site One Kings Lane, eyeglass company Warby Parker, and real estate site Redfin.

Trend #3: Private Value Creation – These first two trends contribute to a clear conclusion:

More of a company’s value is being created when it’s still private.

For example, if you look back at private companies in the year 2000, you’ll find that just 10 companies had valuations above $1 billion.

Today, there are 142 of them.

What This Means For Your Portfolio

If companies are already worth billions of dollars by the time they go public, most of the gains will already have been squeezed out by private investors…

That’s why there’s no “pop” left in the average IPO.

And that’s why you need to avoid the IPO “shell game” and start looking at the private markets yourself.

These markets have been off-limits to ordinary investors like you for more than 80 years, but because of new legislation known as The JOBS Act, ALL investors will soon be able to participate in these private gains.

In fact, the SEC is planning to make an announcement about this topic on Friday.

So don’t let the big banks hijack your money:

Start preparing to get into the private markets now.

Best Regards,
Matthew Milner
Matthew Milner


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Tags: JP Morgan End Of The Stock Market

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