Snap! Trade the latest tech stock to IPO? You must be joking

Snap Inc, the makers of world-renowned photo app Snapchat, debuts on the stock market this week and it will be to a veritable frenzy of trader activity. Touted as the biggest social media IPO since Twitter, it has got investors in a lather as they look to turn a quick profit on the newly-listed stock. Me? No chance. It’s fraught with danger and idiocy. I’m not a stock picker – and here’s why…

snap-generation-a-guide-to-history-of-snapchat-garyvee

Many new companies hit the stock market every year but only a handful of them have the global media salivating and mainstream investors nervous with excitement. Snap is most definitely in that category. The column inches dedicated to Snap’s public offering have been steadily growing over the past six months and, now the stock is imminent, investor fever is past boiling point.

It’s getting hot in here

It’s no wonder financial markets get over-excited when a giant household name goes public. The brand name and the product is familiar, so it’s easy for the proverbial man on the street to take a view on which way the company will go, no matter how ill-informed that view might be. And believe me, it usually is ill-informed.

Why would the novice investor think they can understand the true market value of a complex corporate beast like Snapchat, let alone be able to confidently predict how its share price may fluctuate and evolve in the weeks, months and years ahead? But they do. They think they can. They ALL do.

The incredible volume of interest and speculation this creates – often wild, blind speculation – can be the breeding ground for quick and big trading profits and quick and big losses. The experienced heavy-hitters are out there to make top bucks and prey on the misguided masses. But even they get it wrong half the time! All in all, it’s a lottery on a ridiculous, lunatic scale. You may as well chuck it all on red over black, or odds over evens.

Just look at what happened with the Twitter IPO

Back in November 2013, popular opinion had it that day one trading on Twitter stock was going to be your golden chance to invest early, and at a great price, in this wondrous new breed of tech company. Twitter’s IPO was hailed a momentous success by the trade press. It raised $1.8 billion for the social media giant, with the share price of $26 valuing the business at an incredible $26 billion. The next day, the first day of trading, its opening share price was a far loftier $45.10. Within an hour that had rocketed to $50 before immediately slumping back down to $44 levels and finally ending the day at $44.90.

It was a crazy day of trading, with half a billion shares bought and sold in the first two hours alone, and there were no doubt some big winners and some big losers – not least those who got blinded by the stock tickers and mis-took Tweeter for Twitter. Shares in the little-known Tweeter Home Entertainment Group Inc, a bankruptcy consumer electronics firm, shot up from 5 cents to 13 in early trading as over-eager investors leapt before looking. Some even reported, in their maniacal bubble, and on Twitter ironically, that they’d bought Twitter stock for pennies and that it had since shot up 1800% just moments later!!! As if. (You should have to pass some form of test before you’re allowed to trade stocks, seriously).

It doesn’t always follow, but a big, high-profile IPO like Twitter or Snap can generate enormous price swings in the first hours, days, weeks and even months of trading, because there is such ludicrous media hype, greedy trading and an unrelenting sheep-herd mentality to the whole show. Twitter is a good example in point – it’s share price today is around the $20 mark, compared to its $45 starting point just three years ago – but there are plenty of others too. The five biggest IPOs of all time have endured some considerable swings of their own:

  1. Alibaba Holdings Group – went public in 2014 for an astonishing $21.8 billion raise. Four days later, underwriters exercised an option to sell more shares, bringing the total IPO to $25 billion.
  2. ABC Bank, one of China’s five largest banks, took a bow on July 7, 2010 at an initial offering raising $19.228 billion. The total was over $22 billion.
  3. ICBC Bank fetched a total of $19 billion in 2006.
  4. NTT DoCoMo hit the markets in 1998 raising $18 billion. Underwritten by Goldman Sachs Asia, this IPO launched NTT to the third largest market cap for a Japanese company.
  5. Visa Inc. The card processing company raised nearly $18 billion in 2008, despite being in the guts of the global financial crisis.

Back to the future                                               

Snapchat isn’t quite in the same ball park as these guys but 2016 was a dry year for IPOs so by recent standards it’s one of the biggest stock launches and, for other specific and fascinating reasons, it’s very high profile…

As we’ve discussed, the familiar household brand name alone generates much buzz across media outlets and among novice investors. But Snap is also of huge strategic importance for many industries. The success or failure of Snap will be a big signal for the future fortunes of other tech and social media giants who may be looking to go public over the next few years – mega-names like Uber, Pinterest, Dropbox, Spotify and Slack. Their company values and future reputations are very much linked to the public demand for Snap stock over the next few months and the company’s commercial performance over the next year.

All this introduces even more unknowns and risks into the mix. It makes the whole process of investing in stocks a melodrama of gigantic proportions. Or a tragedy, if you happen to be on the wrong end of a considerable loss.

If not Snap then what? 

Don’t get me wrong, I will gladly look at investment options that are high risk. I frequently bet on sports, after all. But only £2 at a time, or £5 as a rare maximum. I invest in a number of new, unproven peer-to-peer platforms. But I only have 2% of my money there and wouldn’t budge it upwards much beyond that until such firms have proven their worth over a longer period of time. My investment portfolios are all 95% or more in equities. But, and here’s the point, that money is spread across thousands of different stocks and bonds and other assets, in very small proportions.

This – having a globally diverse portfolio – is in my mind the ONLY way to invest smart in the financial markets these days. It means you can track the best companies out there in a particular sector and dilute the risk of losing big chunks of money by having your money invested in little pieces across a lot of ‘horses’.

Be more snail

The other major beef I have with the glamour show that presides around a stock launch like Snap is that it irresponsibly promotes short-term day-trading. It has been shown in countless studies now that high-frequency active trading in stock markets, no matter how experienced you are at it, will more often than not fail to deliver you long-term profits that beat the natural market rises. So, in other words, you’re better off just lumping your money on an index like the FTSE100, or a collection of such indices, and letting those markets just do what they do. Ignore it, go live your life and pick up the profits without lifting a finger or opening a page of the Financial Times.

Here’s one of my favourite proof points that staying the course long term and holding tight – and not constantly buying and selling individual company stocks – pays dividends (to pardon the pun)…

Looking at UK stock market data since 1969, you’d have had a 55.2% chance of making gains if you’d invested across the entire market for 1 day – similar odds to the toss of a coin. Investing for one month ups your probability to 63.9%. Investing for one year boosts your chances to 82.1%. And investing for 10 years or more pushes it to an amazingly attractive 99.4%.

Sorry to put a dampener on the Snap festival but it’s not a bandwagon I’ll be venturing near any time soon. If you’re still tempted, please don’t put in more than you can afford to lose – it might just happen.

 

 

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