I bought a stock last year when it went public. A major brokerage house was the underwriter and had a $30 price target on the stock. I thought it was a good idea to buy the stock at $18 because I thought it would go to $30. The stock, yesterday, was trading below $1. How can a brokerage get it so wrong? Did the analyst, a professional, not do due diligence before announcing such a high price target to the public? It seems that they have aimed for a high price to generate interest in the IPO. Is this ethical? Granted, other firms also cut their price targets on the stock significantly, but the underwriter’s target was the highest. I feel like a “sucker” buying it too high. Feeling like an idiotdear feeling, The underwriter wants to make money. Management wants to make money. Brokers want to make money. And investors want to make money. Everyone’s name is in the hat for the same reason. Not everyone wins. And, sometimes, everyone loses. (I removed the name of the brokerage house and the company from your letter, and read the company’s own description of its services, and I still have no clue what it does. I’m sure you’ll have a better idea.) It’s a The game is an opportunity, and no one, as any IPO prospectus will inform you, can predict the future. That’s why before going public, companies warn investors that shares can go down as well as up, the company can go out of business, and countless other potential disasters. You buy at your own risk, and big brokerage houses — even those that were underwriters for IPOs — often lower their own price targets for stocks, as happened in this case. Analysts who underwrite the IPO and write the initial investor report before the IPO work on the “buy” side of the brokerage. Analysts who evaluate a company’s financial results, competitors, management skills, and other corporate plans after an IPO are on the “sell” side. This is the brokerage side of the investment bank, and these analysts are supposed to arrive at their own objective opinions, regardless of the investment bank’s role as underwriter. Every investor wants to get in on the ground floor of the next Tesla TSLA, -3.03% or Apple AAPL, -0.70% or Netflix NFLX, -2.28% or Amazon AMZN, -2.40% . In his book, “The Wall Street Waltz,” wealth manager Ken Fisher offers a very straightforward, if refreshingly blunt, explanation for your dilemma. “IPO stocks often go up immediately, because the brokers who sell them get several percent sales commissions for their hype, so they create a lot of mindless momentum around these issues,” he writes. “‘Watching an investor make a fortune on individual stocks is like hearing a guy win an Oscar, and say you can manifest your destiny and never give up on your dreams.'” Through excitement and dreams of big hits,” Fisher added. “And they usually get hit, because companies raise money through stock offerings only when the price is good for them — which, on average, might be a good deal for buyers. is too much. Soon the hype wears off and stocks sink.” That hasn’t changed in the age of the metaverse and social media. Why do I know? Fisher wrote those cautionary words a year before the 2008 financial crash. Investors, however, often complain about the opposite problem: IPOs are often underpriced, and this issue is one of the most studied anomalies in equity markets. This recent review looked at a large body of research on the topic, and concluded that companies want to raise their profile as well as raise money, and concluded that underpricing is largely due to “information asymmetry”. In plain English, it refers to one or more parties having more information than others. “Some investors are more informed than others. In other words, they have better knowledge about the quality of companies, which companies are undervalued or overvalued,” author Kailai Wang wrote. His other conclusions may also apply to your case of an overpriced IPO: “Due to capital constraints , assuming that the stock market is not fully populated by informed investors. The IPO price should be low to keep less informed investors in the market.” Investing in individual stocks is a fool’s game, unless you bought Apple 40 years ago at $22 a share. But anyone who does and tells you that buying individual stocks can lead to success (a) probably bought the stock a long time ago, (b) held it long and (c) got lucky. Seeing an investor who has made a fortune on an individual stock is like hearing the person who won an Oscar say you can manifest your destiny. And don’t give up on your dreams. They believe because they’ve done it, and they want you to believe that you can too. Of course, some people get rich and famous by reverse-engineering their own good fortune and selling it to the public. Becoming has a fascinating side hustle promoting his theory. He writes books on how to get rich (fast), gives TED talks on how to get rich (fast), and how to get rich (fast). Appearing in his own television show, But Yad Remember: Even Warren Buffett makes mistakes. It’s easy to get rich slowly through real estate, compound interest and saving for retirement. If you decide to hold this stock, get back to me in 40 years. you Email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com and follow Quentin Fottrell on Twitter. Check out Moneyist Private Facebook group, where we find answers to life’s thorniest money issues. Post your questions, tell me what you’d like to know more about, or catch up on the latest Moneyist columns. Moneyist regrets that he cannot answer questions personally. More from Quentin Fottrell: ‘He’s a grifter’: My father set up a $500,000 trust for my troubled sister and asked me to be a trustee. What are the risks involved in being a trustee? ‘We live in purgatory’: My wife has a trust fund, but my mother-in-law controls it. We earn $400,000 and spend more than we can afford. What is our next move? I’m afraid to tell my partner’: I maxed out my credit cards and racked up $100,000 in debt because of my gambling addiction. Can you help?
