Many IPOs start with a bang, resulting in high first-day closing prices that attract retail investors. Today we unpack new and established research to explore how the hottest IPOs compare with average market returns. We open our conversation by first sharing community updates and details about the book and news of the week. After reflecting on how 2020 was one of the biggest IPO years since 2000, we talk about why IPOs tend to release in waves. We then chat about where IPO allocation usually goes and why most investors aren’t given access to huge early returns. A key insight this episode, we dive into how retail investors impact IPO pricing and why IPO buy and hold returns often trail the market. Following this, we discuss the factors that skew IPO prices, why IPOs resemble lotteries, and whether there is an optimal model for when companies make an IPO. From IPOs we jump into our planning topic on well-being and behavioural coaching. We start by looking into the differences between financial well-being and funded contentment. Linked to this, we talk about other forms of capital that range from human and social capital to temporal capital. We examine the factors that impact your well-being before touching on why you should make decisions while considering all your forms of capital. Later, we debut a new feature and then offer our bad advice of the week. Tune in for another informative conversation on rational investing.

Key Points From This Episode:

From building battlebots to what they’ve been watching, hosts Benjamin and Cameron catch-up with listeners. [0:00:23]
Rational Reminder community updates and added features. [0:02:53]
Being a generalist over a specialist? Hear about the book of the week. [0:06:23]
Hear our news roundup for the week. [0:09:14]
Introducing today’s portfolio topic: investing in IPOs. [0:15:30]
Exploring IPO waves, pricing, and why only high-value investors are given IPO offerings. [0:19:54]
How institutions and retail investors impact IPO pricing. [0:23:00]
Examining the historical buy and hold returns for IPO stocks. [0:25:37]
Why IPO stocks might be the “worst of all worlds.” [0:29:31]
Research that shows why IPOs are like lotteries. [0:30:48]
How ‘skewness factors’ hype up the value of IPOs. [0:34:01]
Why waves of companies tend to make IPOs near the same time. [0:37:11]
Benjamin summarizes his arguments for and against IPOs. [0:42:54]
Introducing today’s planning topic: your well-being. [0:44:22]
Financial well-being versus funded contentment and the different forms of capital. [0:47:11]
The importance of weighing your other forms of capital when making decisions. [0:51:12]
Why high-income doesn’t correlate with higher well-being. [0:53:28]
How nationality and social factors affect self-reported well-being. [0:56:54]
Consequences from people being generally bad at predicting what will make us happy. [01:00:37]
Setting financial goals that consider your well-being and sense of purpose. [01:02:58]
How unemployment can affect your well-being. [01:04:26]
Why you should consider other forms of capital when saving for retirement. [01:06:30]
We answer a conversation card from the University of Chicago Financial Education Initiative. [01:09:30]
Hear our bad advice of the week, courtesy of TikTok. [01:12:20]

Book From Today’s Episode:

Range: Why Generalists Triumph in a Specialized World — https://amzn.to/36hnU39

Links From Today’s Episode:

Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.

Rational Reminder Website — https://rationalreminder.ca/

Shop Merch — https://shop.rationalreminder.ca/

Join the Community — https://community.rationalreminder.ca/

Benjamin on Twitter — https://twitter.com/benjaminwfelix

Cameron on Twitter — https://twitter.com/CameronPassmore

‘Index Fund Trillions Are Distorting Prices in the S&P 500’ — https://www.bloomberg.com/news/articles/2021-01-13/trillions-of-dollars-in-index-funds-are-distorting-the-s-p-500

‘Quid Pro Quo: What Factors Influence IPO Allocations to Investors’ — https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12703

‘The Long-Term Performance of IPOs, Revisited’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2929733

‘Initial Public Offerings as Lotteries: Skewness Preference and First-Day Returns’ — https://pubsonline.informs.org/doi/abs/10.1287/mnsc.1110.1431?journalCode=mnsc

‘Rational IPO Waves’ — https://www.jstor.org/stable/3694852

‘High income improves evaluation of life but not emotional well-being’ — https://www.pnas.org/content/107/38/16489

‘What do Self-Reports of Wellbeing Say about Life-Cycle Theory and Policy?’ — https://www.nber.org/papers/w24369

‘Neighbors as Negatives: Relative Earnings and Well-Being’ — https://www.nber.org/papers/w10667

‘Inequality at Work: The Effect of Pure Salaries on Job Satisfaction’ — https://www.nber.org/papers/w10667

‘Scarring or Scaring? The Psychological Impact of Past Unemployment and Future Unemployment Risk’ — https://www.jstor.org/stable/41236648

About The Author

Cameron Passmore

Cameron Passmore has been a leading advocate for evidence-based, systemic investing for over 20 years in the Ottawa area. Today, Cameron and his team serve a broad range of affluent clients across Canada.