Three Big Letters- IPO

Vol #18- December 11th, 2020

This week has been all about three capital letters - IPO.

Household names Airbnb and DoorDash are shooting to sky high valuations as they enter the public markets for the first time in their Initial Public Offerings (IPO). Having long been funded in the private markets, these entrants started off at 11 digit valuations and rocketed higher.

Bryan Chesky, the CEO and founder of Airbnb watched his stock price double as the pricing began, and was quoted speechless, “I’m very humbled by it.” DoorDash saw a similar story, jumping up 86% on its first day of trading.

There are many people who have become very wealthy thanks to this. Employees, bankers, and investors along the way have supported the company and turned ideas into reality. Many of these rewards are well deserved, but it’s important to remember the difference between paper and real valuations.

Investors have seen this movie before. Twenty one years ago this week, one of the largest IPO pops in history happened with VA Linux Systems. The tech company originally priced at $30, and had a first print of $299. The top of the day was $320, and stock closed at $239.

If you bought on the open you would have shown a one day loss of over 20%. If you - like the owners of the company were required to - waited six months to sell your shares, they would be trading at $40. Employee Chris DiBona was quoted as saying “Early on, we realized that until you actually sell your stock, it doesn’t exist.”

Paper profits, and paper losses are part of trading. You can’t take blinking green digits to the bank, unless you sell the shares. And on the flip side, just because you’re showing down today, doesn’t mean you’ve locked in a loss.

It’s important to remember your time horizon when investing. If you’re looking for a trade, have a defined risk tolerance and duration. (Options are great for that!) If you’re looking to invest, don’t get distracted by the day to day.

It’s easy to see the winners and think it’s all gravy. But for every DoorDash or Airbnb investor, there’s someone who bought Groupon and lost 85% their first year, or a saw a Superbowl ad for Pets.com, and fell for an $11 IPO that went to $0.19 within 9 months.

When you’re a long term investor, not every day can be green, and drawdowns mean opportunities to dollar cost average into equities. When you’re writing options contracts, having the capital to withstand fluctuations in the market is what earns you the insurance risk premium over time.

While watching these new companies trade brings vibrance and excitement to the market, and we can’t wait until the options list next week, at Harvested Financial we’re here to play the long game.

Thanks for joining us,

Mark Phillips
CEO

Happy Friday!

One of the most famous movies about Wall Street is the eponymous production by Oliver Stone. Michael Douglass embodies Gordon Gccko’s lust for greed, and Charlie Sheen plays the wide eyed Bud Fox, hoping to make it to the big leagues.

The film debuted on December 11, 1987. The stock market crack and rebound is reminiscent of what we’ve seen in 2020. Less than 2 months earlier, the markets had been shocked by the Black Monday crash, where the stock market fell over 22% in a single day. The markets rallied back to close the year just net positive.

The film not only received critical acclaim, but it became an aspirational roadmap for a generation of up and coming stock brokers. While Oliver Stone originally intended the film to be a warning against the excesses of the era, the most quotable line has become “greed, for lack of a better word, is good.”

Gecko and Fox move through iconic scenes in downtown Manhattan, Central Park, and of course to order the off-menu steak tartare at Tavern on the Green. The connection at the airport smuggles Cuban cigars to curry favor, and well placed old friends and family provide the “most valuable commodity I know of - information”.

With Frank Sinatra’s “Fly Me to the Moon” playing in the background, the bustle of the subway is intoxicating. The views from Gordon’s beach house beyond its art lined staircases make corporate espionage seem all the more enticing. (The actual house recently went up for sale.)

Movies like “Wall Street” stylize the era and portray archetypes. While insider trading still happens on a regular basis, it’s not what the movie shows. But we can still celebrate the ability of this film to capture the zeitgeist of the late 1980s, which still resonates 33 years later.

WATCH THE ORIGINAL TRAILER HERE