Ten Surprising Things About Warren Buffett

Ten Surprising Things About Warren Buffett

Warren Buffett is known as a legend among stock investors.

For decades, he has beaten the market by selecting undervalued stocks.

He has invested with courage when others have feared the future, and he has exercised caution when others have been greedy.

But Warren Buffett has learned the hard way. He has learned by making mistakes in life. He has stumbled, gambled, lost money, failed, felt shy, been rejected, and even been lied to.

He has tried things and figured it out. Most importantly, he has learned from his mistakes and made them into investing rules.

You don’t often hear about his early battles and the mistakes he has learned from.

Here are ten of them.

1. He Began His Career with Chewing Gum and Newspapers

He has worked on building a fortune since he was a child.

He started selling chewing gum for a nickel in his neighborhood, and later he also delivered newspapers.

He also ran a slot machine business.

He bought old slot machines, repaired them, and made an agreement with the barber shops that they would get half of the money that came through the machines.

He told the barbers that he was just the errand boy even though he himself owned the machines, so he didn’t have to negotiate with them. He could just tell them that the owner said no to installing more machines. He felt it was hard to stand up to the barbers.

By the time he turned 16, he had earned $ 53,000.

2. He Bought His First Shares at 11 Years Old – But Failed

When he was 11 years old, he bought his first share. He bought three shares in Cities Services for $38 a share in 1942.

That company had terrific success. A few years later, the amount had quadrupled. By 1945, the company’s shares had risen to about $160.

But Warren Buffett didn’t get to enjoy that ride. He sold the shares a few months after purchasing them at $40.

He made $5.25 on them – and was annoyed.

It was an experience – and an early mistake – that has shaped him as an investor. He used it once as an anecdote at Berkshire Hathaway’s annual meeting as an example of how important it is to hold on.

3. He Experienced the Pain of Being a Gambler

At 16 he began betting on horses.

One day, he went alone to the racetrack and started losing. He became so keen on getting the money back that he had a hard time stopping himself.

In one day, he lost $ 175 dollars, which was a lot of money back then.

Afterwards, he had a huge ice cream and pondered the day’s events. He decided never to behave like that again.

He mentioned the incident in the biography The Snowball:

“I’d committed the worst sin, which is that you get behind and you think you’ve got to break even that day. The first rule is that nobody goes home after the first race, and the second rule is that you don’t have to make it back the way you lost it. That is so fundamental, you know.”

He says he made an emotional decision.

“Oh, I was sick. It was the last time I ever did anything like that.”

4. He Was Rejected by Harvard

It was his dream to go to Harvard Business School, but his application was rejected – and that was one of the most important events of his life.

It was a blessing in disguise, though it certainly felt like a defeat at the moment.

If he hadn’t been rejected, he wouldn’t have become an investment legend.

He ended up going to Columbia where Benjamin Graham – the author of the investing bible The Intelligent Investor – taught.

If he had not gone to Columbia, he probably wouldn’t have become a value investor.

5. Berkshire Hathaway Was a Ruin

Today, everyone thinks of his company, Berkshire Hathaway, as a success.

But originally Berkshire Hathaway was an old American textile company that he acquired. When textile production was outsourced to Asia, Berkshire Hathaway had no future.

Instead of shutting down the company as the gigantic investing mistake it really was, Warren Buffett used the shell of it to continue his investing business.

6. He Had Two Wives

His first wife, Susan Buffett, left him but stayed married to him.

Susan Buffett had grown tired of life in Omaha when she moved to California to try out a life as a professional singer.

They had been married for many years, and their three children were adults and had moved away from home.

She introduced him to her friend Astrid Menks, who worked at a local cafe, and asked Astrid to look after him and make sure he got something to eat.

The girlfriend, who is Buffett’s second wife, moved in, and they lived for many years as husband and wife while he was still married to Susan.

He was unaware that Susan had also settled with her tennis instructor in California. He only discovered it when she died in 2004. He has expressed regret about not marrying Astrid earlier.

Astrid had lived with him since 1977, when Susan flew to California. They were married in 2006, a few years after Susan’s death.

7. He Earned 99 percent of His Money After Turning 50

There is no doubt that Warren Buffett was successful as a young man, but he really became ridiculously wealthy in his older years.

This is due to the effect of compounding. The exponential growth took off during the second half of his life.

His net worth was $357 million when he was 52 years old. It is more than $110 billion today (2021).

8. His Father-in-Law Told Him He Would Fail

When he proposed to his first wife Susan, his father-in-law wanted a man-to-man conversation with him.

Warren Buffett had at this point already made a small fortune, but his father-in-law didn’t care much about that.

He told Buffett he would fail.

According to an interview with CNBC, Warren Buffett has quoted him as saying:

“You’re going to fail. And the reason you’re going to fail — my daughter may starve to death and you’re going to fail, but I’m not going to blame you because it’s because the Democrats are in and they’re all Communists.”

9. He Still Lives In His First $31,500 House

He still lives in the house he moved into as a newlywed with Susan Buffett.

First they lived there as tenants, and later they bought it for $31,500 in 1958.

It’s a house with five bedrooms, two and half bathrooms.

This isn’t really a mistake, but more a testimony to how peculiar he is and how little he cares about material things.

Money for him is like an intellectual game.

10. He Was a Young Man Who Couldn’t Say His Name

Every year, Warren Buffett speaks to millions of people at Berkshire Hathaway Annual Meeting.

About 40,000 are present in the hall, and many more are watching live, as it’s being broadcast and streamed on Yahoo Finance.

Initially, however, he was so shy that he had a hard time saying his own name in public.

He couldn’t bring himself to speak in front of assemblies at all.

As a young student, he took a Dale Carnegie course in public speaking, and he has referred to that course as the best investment he has made in his life.

But he almost didn’t take it.

First he signed up, and then he cancelled because he got nervous.

Then he decided to sign up again, this time paying cash upfront so there was no going back.

That did the trick.

“The best investment you can make is an investment in yourself,” Warren Buffett has later said, and he often refers to that course.

Your first step towards learning more about investing could be downloading my free e-book Free Yourself. You can get it right here.

Ten Key Takeaways From Berkshire 2021

Ten Key Takeaways From Berkshire 2021

Warren Buffett and Charlie Munger answered question for around three hours at the annual Berkshire Hathaway meeting this weekend.

What can you learn from them this year?

I’ve written down 10 key takeaways from the annual meeting 2021, which for the second time took place without the usual crowd due to COVID-19.

Here are the 10 main points:

1. Stay Alert: Don’t Be Too Sure of Yourself and Your Investments

Warren Buffett showed a list of the 20 greatest public companies today and compared it with a list of the biggest public companies from 1989.

Before revealing the list, he asked the audience to guess how many companies from 1989 stayed on the list.

The answer was none.

He used that as a warning to investors:

“We were as sure of ourselves in 1989 as we are today.”

2. Bet on America

He also pointed out that, on the list of the biggest companies, 5 of the top 6 are American.

“It’s not an accident. It shows us that the [US] system has worked unbelievably well.”

He made the point that you can bet on America, and if you don’t know what to invest in, he recommends S&P 500 as an index fund (Charlie Munger recommends investing in Berkshire over S&P 500).

“The main thing is to get on a ship. Any ship,” Warren Buffett said.

3. Tread Carefully in This Market

Warren Buffett had brought with him a classic textbook about economics.

He looked up negative interest rates in the index and found nothing.

He then looked up interest rates, and found the following written:

“You can technically conceive of negative interest rates, but it can’t really happen.”

Warren Buffett explained that in the short run everyone feels good about the rates.

“So far we have no unpleasant consequences. It causes stocks to go up and business to flourish. But there are consequences to everything in economics.”

He says that people are becoming numb to numbers, and that the long term is still unknown to everyone.

“Charlie and I consider it the most interesting movie we have ever seen,” Warren Buffett said.

4. Careful With Betting on Tesla

He didn’t say this directly, as he always avoids singling out individual companies and CEOs.

Instead, he told the audience a story about a car company called Marmon who was considered the big upcoming car company at the turn of the century because they invented the rearview window.

“Everybody started a car company and very few picked the winner,” he explained.

He had looked them up and had expected to fill a slide with extinct car companies that began with the letter M. He could fill the whole slide with extinct car companies that began with the letters MA.

“At least 2000 companies entered the auto industry. In 2009 there were three left and two went bankrupt,” he said.

5. Stay Away From SPACs

SPACs (special purpose acquisition companies) have two years to find something to invest in or they have to give the money back.

They have to do that in a red-hot market were little is for sale, and everything is historically expensive.

“If you put a gun to my head and said you’ve got to buy a business in two years, I’d buy one,” Buffett said. “But it wouldn’t be much of one.”

A lot of people invest in SPACs hoping that they will go higher the next week.

“No one tells you when the clock strikes 12, and it turns into pumpkins and mice,” Buffett said.

Charlie Munger was a little more blunt when talking about SPACs.

“It’s not just stupid. It’s shameful.”

6. Charlie Really Believes in China

Charlie Munger has recently invested in Alibaba.

He didn’t comment on Jack Ma’s disappearance and reappearance and the presumed involvement of the Communist party in this.

Instead, Charlie Munger explained that a sea change happened when the Chinese decided to change communism into a version that accepts Adam Smith and capitalism.

“It was a remarkable change. It has worked like gangbusters. They lifted 800 million out of poverty. My hat’s off to the Chinese,” he said.

7. Warren Buffett Bets on Bank of America

He says he feels good about American banks in general, but that Berkshire decided to raise its stake in Bank of America, to above the 10 percent threshold, while lowering the overall position in other banks.

Before you run off to buy stocks in all kinds of banks, listen to this other quote from Buffett:

“We like the banking business much more today….in the United States. Banking around the world can worry me more.”

8. Stay Away From Bitcoin

Warren Buffett didn’t want to offend anyone who owned bitcoin, so he passed on making any general comment about it. Instead, he passed the mic to Charlie. 

Charlie Munger didn’t worry about offending anyone.

He flatly said,

“Of course I hate the bitcoin success.”

The problem?

He thinks it’s insane to invent a currency out of thin air. There is no inherent value in it other than what people think other people will buy it for in the future.

It’s called speculation, not investing.

9. Shame on Robinhood

Warren Buffett explained that a lot of the short-term speculative option trading takes place on Robinhood (in particular the selling of calls with a 2-week expiration).

“It’s become a significant part of the casino economy,” Warren Buffett said.

He said it’s not immoral but that they cater to the gambling instinct in people.

Charlie Munger wasn’t afraid of calling it immoral.

“It’s deeply wrong. We don’t want to make our money selling things that are bad for people,” Munger said.

10. Inflation Has Arrived

Warren Buffett receives regular information about pricing development from the business that Berkshire Hathaway runs.

When asked about inflation, he calls the market red-hot, in particular the real estate market.

“We are raising prices, and people are raising prices to us. It’s up-up-up.”

He added how odd it is that the current situation is terrible for 80 percent of the population and yet 20 percent of the population has money burning in their pockets.

“This is a crazy movie.”

Don’t forget to read my e-book that explains Warren Buffett’s investing style – including my favorite way to calculate what a company is worth. You can get it here.


Share Buyback: Three Things to Watch Out For

Share Buyback: Three Things to Watch Out For

What does it mean when a company announces share buybacks?

Is it a good thing or bad thing? Should you rejoice or worry about it?

The short answer is that share buybacks are good when they benefit the shareholder and bad when they don’t.

The next question is, when are they and aren’t they beneficial?

But first, let’s define share buybacks. What are they exactly?

It’s the company buying back its own shares from the stock market so they are no longer in circulation.

Why do companies do it?

It’s a way of rewarding shareholders. The consequence of share buybacks is that the share price usually goes up.

How’s that?

Imagine you have a cake that needs to be divided into ten pieces.

Let’s say you redivide it and split the same cake into eight pieces instead of ten.

To be exact: We go back to the original size of the cake, dividing the same amount into eight pieces instead of 10.

Now each piece is larger. Therefore, each piece should cost more.

Then surely, it must by definition be a good thing when a company buys its own shares back, right?

No. Not necessarily.

You need to look at it in a larger context and ask a series of questions.

You have to ask:

Is the Company Profitable?

If the company isn’t profitable, it’s a bad idea for them to start buying back their shares.

Running on a deficit is like having a hole in the bucket, and they need to focus on closing that hole before doling out money to shareholders.

Share buybacks are a way to distribute the year’s gains to shareholders. It’s an alternative to dividends. They shouldn’t distribute winnings if they don’t have any winnings. It’s that simple.

If you discover that a company buys back its own shares during a period when they are running at a loss, you should sell that company’s stocks (or avoid investing in them).

It’s a sign of poor management.

Do They Owe a Lot of Money?

If the company is over its head in debt, management shouldn’t buy back shares.

When they buy shares back, if they do so on borrowed money, they increase the debt burden.

They should instead spend that money on paying down debt.

What’s the problem with having a high debt burden?

Companies with a lot of debt are at greater risk of going bankrupt in a downturn or crisis than companies with lower debt.

It’s not much different from a person with a lot of personal debt. If the person gets fired, they’re at a greater risk of not being able to pay the bills and going into foreclosure than a person with low or no debt.

How much debt is too much? That’s a great question too.

My rule of thumb is that I only invest in companies that can pay off their long term debt in three years with free cash flow.

Is the Stock Expensive or Cheap?

If the shares are expensive relative to the value of the firm, it doesn’t make sense to buy back shares.

Why not?

Because they’ll pay too much for the stock. They’d be throwing money out the window.

A share buyback is just like an investment.

Let’s say that a company is actually worth 100 USD per share. If they buy shares back at 200 USD per share, they throw 100 USD out the window every time they buy one share back.

Remember that it’s also your money that the management mismanages. As an investor, you are a co-owner of the company. The management is just a deputy.

Why do stock investors ignore badly managed buybacks?

Many stock investors believe that the stock market is efficient, and if you believe that, it follows that any share price is therefore a reasonable level to buy the shares at.

In my e-book Free Yourself, I explain why the stock market isn’t efficient. You can download it here.

The Pros and Cons of Share Buybacks

Warren Buffett loves buybacks – provided they’re done right. His company Berkshire Hathaway does it regularly.

If it’s an alternative to dividends, what are the benefits of buying shares back relative to dividends? Why is Warren Buffett so fond of it?

The answer is simple: tax benefits.

When you receive dividends, you have to pay taxes. When the company buys back its own shares and the stock price goes up, you don’t pay capital gains tax (provided, of course, that you don’t sell the share yet).

The effects of compounding are hurt with dividends. In other words, your money can better enjoy the power of compounding with stock buybacks.

So what are the disadvantages of buybacks?

They only occur if the repurchase is done on a “false” basis, like in the three points above (done by unprofitable businesses with high debt burden and that are overvalued on the stock market).

Why does it even happen that management buys back shares even though the foundation isn’t in place?

It happens because the management has an interest in getting the stock price pumped up.

Many companies reward top management according to the performance of the stock price, e.g. with stock options and various bonuses depending on the stock performance.

They’ll only get paid if the stock reaches a certain level.

This means that many executives tend to make stock repurchases out of self-interest to get their bonus pay, and sometimes their selfish interests are so great that they ignore common sense.

In conclusion, there’s really no way around it. When a company reports share buybacks, you have to check if the company is profitable, has a reasonable level of debt, and whether it’s over or undervalued on the stock market.

You can learn much more in my free e-book Free Yourself right here

Ten Surprising Things About Warren Buffett

How To Tell If You’re Addicted To Stocks

This blog post is for fun – and then again, it’s dead serious. 

I remember a wonderful spring day when a friend I hadn’t seen for years was visiting Copenhagen. We had studied together in New York almost two decades earlier. 

We were sitting at a winery in Copenhagen, drinking a glass of Chardonnay before dinner while waiting for some more people to join us.

At a moment when she was on the phone to explain our exact wine-drinking location, I discreetly logged into a stock market app on my phone.

“You’re checking the stock market,” she said when she got off the phone, and she sounded completely appalled.

At that moment, I felt like one of the crazy characters in a Woody Allen movie. I could see myself through her eyes. I was like the crazy stockbroker who could only do two things: cheat on his wife and yell “sell” into a phone.

Well. Maybe it was a bit odd to check the stock market. We hadn’t seen each other for so long. She had a lot to tell me. New country, new boyfriend, new career, and a baby. We had to catch up on a decade or more. 

I wanted to enjoy the Chardonnay and the warm spring day, and I wanted to hear all about her adventures. But the market was falling, and that opened the possibility for some interesting option trades that I had been waiting to do.

If only I could sneak away for 15 minutes…

It’s so tempting to check on the stocks, and once you check, you can get sucked in.

Have you ever felt that way? Have you ever checked on your stocks at an inappropriate moment? 

Why does this even happen?

I’ll tell you why. When you check your stocks, you get a dopamine kick.

It’s similar to what happens when you check your social media, but much stronger, I would argue.

Seeing your stocks go up affects your primitive brain more than seeing someone like your post.

Some of us even get a kick when we see the stocks go down, because we know that’s when we make money. 

The line between checking and getting addicted to checking is a blurry line. 

How do you know that you’ve become addicted? Well, here are five signs to look for…

1. You Check the Market Right When the Exchange Opens – Every Day 

If you’re knocking at Wall Street’s gate even before it’s really open, and doing that every day, it’s a sign. 

It’s fine to check the stock market prices, but you should also be able to tolerate forgetting about it occasionally or doing it later. 

2. You Check Your Portfolio Even on the Weekends 

You checked the portfolio Friday at market close, and you know the market is closed on Saturdays and Sundays, but it’s just so nice to see those numbers on the screen. All those wonderful green numbers – or even the red ones. 

You’re actually looking forward to Monday so the digits start moving around again.

3. You Think There Are Too Many Official Holidays

You get annoyed that the market is closed on holidays, and you’d rather be at work than at home with the stock market closed. You just won’t verbalize it.

Speaking of work, you’ll check the stocks at work too. That’s when the market is open, so you have to right?

4. Life Outside the Trading Platform Feels Dull

You find it hard to focus on reading a book or watching a show.

Even social media seems boring compared with the numbers going red and green.

Some social events feel like a bore too. You’d rather get back to making money.

5. You Check Stocks In Bathroom  

Oh, I’ve been there. Remember FAANG stocks getting crushed in late 2018? 

I tried hiding from my kids on Christmas Eve so I could buy some Apple stocks that suddenly reached my target price.

I didn’t succeed because my kids were banging on the door and being impatient about Christmas and presents.

After that I promised myself NEVER to do that again.

The Road To Recovery

Did you recognize any of these signs?

If so, then you need rehab.

You have to learn that you can make sound investment decisions without constantly getting a stock market fix. 

In fact, your investment decisions will become sounder if you take a step back.

So how do you take a step back?

1. Enter Your Trades as Limit Orders in the Off Hours

You don’t have to enter your trades when the market is open.

In fact, it’s better not to, because all those numbers running up and down sends a signal to your brain that you should act on it.

You’ll be a better investor if you’re less updated. That’s something you’ll have to experience over time to know, but for now you just have to trust me.

2. Go Cold Turkey For 30 Days

Just like with a sugar addiction, you need to reboot yourself by stopping the actual intake for a while.

When I say cold turkey, I mean that you shouldn’t check the market at all in 30 days – not even when it’s closed.

You have to learn that nothing will implode if you’re not updated for 30 days. 

During those 30 days, you can arrange for someone to let you know if any of your positions fall more than 20 percent or if the market crashes.

After going cold turkey, you can easily go a day without checking. 

3. Force Yourself Into Another Neutral Addiction

Maybe now is the time to watch that Netflix series everyone is talking about? 

There are three kinds of addictions: negative, positive, and neutral. 

A negative addiction takes a toll on your health, your finances, or your relationships. 

This would be something like smoking, gambling, or having extramarital affairs.

A neutral addiction doesn’t harm anyone, but it doesn’t do any good either. This could be watching Netflix or checking your social media accounts. 

A positive addiction would be running or going to the gym. 

If you could find a positive addiction to replace your stock market fixation, that would be perfect, but it might not be realistic to replace that dopamin kick with chewing veggies.

So the next best thing is a neutral, pleasurable choice like a Netflix series. 

Afterwards, you can always take a cold turkey break from Netflix because you’ll have strengthened your willpower and ability to abstain. 

If you want to learn about solving intellectual puzzles and investing with a strategy, you can read my e-book Free Yourself here

Five Emotional Advantages to Investing in Stocks

Five Emotional Advantages to Investing in Stocks

When talking about the advantages of investing in stocks, most people talk about financial profit and returns, but cool cash is far from the only thing you gain when you invest. 

 A lot of people have a specific financial goal.

Maybe they invest to be able to retire comfortably. Maybe they invest to be able to afford a certain type of home at some point. Or maybe they invest to become financially independent.

Whatever the specific goal, there is probably another reason why you invest: the emotions you will experience when you reach your goal.

It might be a feeling of security knowing that you can retire comfortably. It might be a feeling of having more choices. Or it might be a feeling of having more control over your life.

The good news is that those feelings will begin to emerge a long time before you reach your financial goal.

The feelings will begin to settle the moment you take charge and begin to invest in a serious way.

Obviously, the feelings you experience will depend on how you invest.

If you invest in a way that resembles gambling in a casino, the feelings of stress might deepen.

Investing based on some random thing you pick up listening to a podcast or reading a post in a Facebook group might turn your emotional life into a roller coaster ride as the stock market moves up and down.

But if you invest in a way that is grounded and reliable, if you follow a strategy, and if you research before picking a stock, you’ll experience feelings of freedom, control, and security a long time before you reach your financial goal.

I have no crystal ball, and I can’t tell you exactly how your life will change. But I can tell you what changed in mine when I began investing in stocks as a value investor.

Here are five emotional changes I have noticed in my life: 

1. Less Stress

Previously, I was always in a hurry. 

I got irritated over small things, like a traffic light changing to red. I felt life was like an assembly line that I couldn’t keep up with. I was always behind, and any small change or delay messed it all up even more. 

Today, I have a feeling of time abundance. My time is mine, and I decide what to do with it.

Whenever I go somewhere, I make sure to plan extra time, so I’m no longer in a hurry going from A to B. I notice small wonders, like sounds of birds chirping or the laughter of a child – and I notice them while waiting for the traffic light to turn green.  

2. Less Grumpy 

Previously, small matters would make me grumpy.

Standing in line at the store, other people were obstacles. I hope I was polite enough, but my attitude was ‘don’t-even-think-about-asking-me-if-you-can-jump-the-line”.

Today, I know my local cashier by name, and I know she invests in stocks. I chat with the people I recognize. Strangers have become three dimensional, and I have more fun interacting with them. They aren’t just obstacles to avoid on the assembly line of life. 

3. Better at Protecting my Boundaries

Previously, I let my boss walk all over me.

When I announced my first pregnancy, he responded with a stone-cold face and told me that I should spend the maternity leave thinking about whether I was working at the right place. He basically told me that I was no longer welcome. Forget about congratulations, flowers or greetings from the workplace after the baby’s birth. I didn’t call attention to it. I let it all slip by. 

Before coming back from maternity leave, I was demoted and told that I was starting from scratch because I had been on maternity leave. In the end, I was fired while on my second maternity leave.

The signs were very clear from the beginning. I should have gotten up and left at the first sign of discrimination. 

Why didn’t I get up and leave? Because I needed the salary to pay my bills. 

Instead, I let myself be humiliated, and letting that happen gave me a feeling that it was the only way to live life. I stopped putting up sound boundaries in other parts of my life. 

Today, I have very clear boundaries. I check in with my feelings as guides. If something doesn’t feel right, it probably isn’t.

I leave the situation or the relationship and I don’t look back.

4. Better at Living Like a Minimalist

Previously, I had a hard time letting go of stuff.

I’m talking about all that stuff we collect throughout life. The pants that don’t really fit. The high-heeled shoes we never got around to wearing. The coffee machine we stopped using.

I was afraid of needing it later on.

Today, I let go of everything that I don’t use or that doesn’t bring me joy. I know that I can always buy what I need later on. When I pass the stuff on to friends or charity, I know it’ll bring joy and be used. 

I know that having a clean closet and a minimalist lifestyle is a lot more valuable than the stuff itself. 

5. Better at Enjoying My Own Company 

Previously, I felt jittery in my own company.

It was hard for me to be alone for more than a few hours. I felt like I was missing out on something all the time. 

Today, I really enjoy my investing practice.

It feels like playing chess with the world. I’m trying to figure out the next move before it happens. You could also say that researching a specific company feels like solving a riddle. 

I can easily spend days on my own with my investing “hobby” because it is satisfying on an intellectual level. 

It has given my life a new layer.

If you want to learn about solving intellectual puzzles and investing with a strategy, you can read my e-book Free Yourself here

Your Quick Guide to Investing in IPOs

Your Quick Guide to Investing in IPOs

Investing in companies going public on the stock exchange can be very alluring.

Many private investors dream about hitting the next jackpot, like Amazon, Microsoft, or Google.

Did you know that if you had invested 18 USD in Amazon’s initial public offering (IPO) in 1997, you would have more than 12 million by 2020?

The truth is that for every Amazon and Google, there are thousands of stocks that completely flop on the stock exchange.

Many IPOs fall flat within a year of going public.

In fact, studies have shown that you would be better off investing in an index than investing in IPOs.

Why is that? What are the shortcomings of IPOs?

  • The companies are expensive 

Companies only go public when the market is at a high level. The people selling the company want to get a good price for what they are selling. Many IPOs take place at the end of a long bull run. You simply cannot find an IPO that is cheap. 

  • IPOs come with professional salesmanship that’s hard to resist

It’s expensive to take a company public. The company has to make a prospectus and get help from an investment bank. There’s a lot at stake and highly professional marketing behind this whole process. It’s hard to resist IPO salesmen. 

  • Private investors’ own dreams of hitting a jackpot pump the price up

 There’s so much excitement about an IPO, and it’s hard not to get carried away. You sometimes see that the stock trades at a high price just after going public, only to crash a few weeks or months later. Why is that? Investors hope that the IPO is the next big kill, and they’re afraid of missing out from the get-go.

Still interested in IPOs? Well, you can still invest in them, but you have to be careful. 

What are some rules you should set up for yourself when investing in IPOs?

Here are a few:  

1. Check the Prospectus  

So many private investors don’t even look at the prospectus before buying those hot IPOs. That’s the biggest no-no of them all.

You have to open the books and look at the numbers.

At first, you just glance through them to try to figure out if you should proceed and research some more.

Does the company even make money? Many companies going public are actually not profitable.

Don’t presume that the company you’re interested in is profitable just because the management talks of a glorious future and some analysts predict they’ll become the next big thing.

That’s just hot air from crafty salesmen. You want proof. 

2. Follow a Checklist 

In theory, you should do exactly as you do when investing in any other public companies. You should follow a checklist to make sure that:

  • The company is growing and profitable
  • They have competitive advantage
  • You like the management
  • They haven’t run up too much debt

 That’s just the beginning. You can download my checklist right here.

The goal of the check list is to ensure that you invest in a company that will be bigger in ten years. Keep that in mind. 

3. Calculate What It’s Worth   

Even the best company can be a lousy investment if you buy it too expensive.

Many IPOs get hyped and sell at a very expensive level.

You can learn how to calculate what a company is worth in my e-book right here.  

4. Limit Your Exposure 

Don’t invest more than you can handle losing.

IPOs fall in the category of risky investments, and you shouldn’t place more than 10 percent of your investable capital in risky investments.

It’ll be volatile and unpredictable. Placing a significant amount of your wealth in an IPO is like eating lollipops for breakfast – it will make your blood sugar unstable and make you irritable all day. You might even have trouble falling asleep at night because your heart is racing. 

Having a huge share of your portfolio in an IPO will make it all very unstable, and you run the risk of losing your cool.

Consider the money you place in an IPO money lost. It’s almost as risky as betting in a casino. 

Other Jackpot Investments

Studies have shown that investing in a fund that matches a stock index is, generally speaking, a better investment than IPOs.

In other words, you are more likely to hit the jackpot by betting on a decent ETF than betting on IPOs. 

Also, remember you might get a much better shot at the IPO later on when the company has matured and proven itself as a business. 

Many IPOs’ stock prices plummet later on. The company might become cheap when going through some kind of event or going through a general market crash.

After the dotcom bubble, Amazon fell from 110 USD per share to 6 USD per share. It was a much better and more secure investment in 2001 than in 1997 (the internet was still a bit exotic in 1997, but by 2001 everyone knew who Amazon was).

Finally, don’t forget that there are many other companies out there that can become very lucrative investments.

Did you know that if you invested with Warren Buffett’s Berkshire Hathaway from 1964 until 2020, you could have turned 10,000 into more than 200 million?

Berkshire Hathaway never had an IPO and never invested in IPOs. 

Buffett bought up all the shares of an old textile company and turned the shell into an investment company. He avoided all the pomp and glory of an IPO and tiptoed through the back door. 

You can learn to invest like Warren Buffett by downloading my e-book Free Yourself. You can get it for free here