Initial public offerings (IPOs) are done to enable startup founders and early private investors to cash out by transferring part of their company to outsiders. To get the best buck for their offering, IPOs are generally released into high markets where rich multiples bring top payouts to sellers and underwriters at investment banks. For these reasons, IPO shares typically plunge in price soon after they are purchased, and prove poorly-timed investments for the public.
In 2017 IPO offerings in cryptocurrencies were the latest rage. As we explained in our client letter in November 2017 (available here), with no income yield or reasonable capital preservation prospects, initial coin offerings were never ‘investment opportunities,’ but always pure gambling.
Worse than acknowledged gambling activities like cards, craps, or the race track, gambling in security markets generally inflicts broader harm because participants don’t understand they are gambling, but believe they are ‘investing,’ and so wager large amounts.
Ben Graham explains in his seminal book Security Analysis (1934):
“Trouble arises from misuse of the term ‘investment’ to cover the crassest and most unrestrained speculation. The difficulty could be cured by re-adopting the old time, clean-cut distinctions between speculationand investment.”
In The Intelligent Investor (1949), he returns to this definition:
“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
This recent Beyond The Valley podcast investigates how one of the many cryptocurrency scams in the past couple of years bilked so-called ‘investors.’ Classic lessons to learn here.
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