Why Savvy Investors Avoid the Temptation of Trends

By Matt Howell, AIFA | Apr 25, 2022 |

Remember all those hot IPOs investors were chasing last year? Investors who found themselves caught up in that record-breaking IPO market are now licking their wounds. The returns have, so far, been disappointing.

Source: Tony Webster/Flickr

For the past two years, thematic investing has been a hot topic. Generally, it means buying stocks or other investments that benefit from a particular trend such as electric vehicles or remote work.

While it can be tempting to buy into new technologies, companies going public through an IPO (formally known as an initial public offering), or the hottest themes—and just as tempting to buy what’s fallen the most (like hotels and cruise lines in early 2020)—neither approach offers an easy path to higher returns. In fact, many of the hottest investment themes and individual companies that performed well at the onset of the pandemic have given up all of their initial outperformance.

For example, Zoom is down 20% despite its continued widespread adoption. At one point in the pandemic, Zoom announced it had 300 million daily meeting participants. This goes to show that a good company with strong growth can still be a bad investment if the stock price is too high. After all, liking a company and its products or services is not an investment thesis.

Line graph showing IPO Investment Growth

What we’re getting at here is that thematic investing—whether it’s in the newest company public offering or in some new sector of the market or some new technology—isn’t all it’s cracked up to be. And, the data backs that up.

IPO Performance

Let’s look at how the largest IPOs from 2021 have performed since the day they started trading, as well as from their 52-week high. On average, stocks included in the list are trading about 30% below their IPO Offer prices and nearly 60% below their 52-week highs.

Chart showing the top IPOs from 2021
This table shows a sample of the top IPOs from 2021.

Since many of these stocks started trading well above their IPO price (unless you were awarded IPO shares), an individual investor who bought on the first day of trading is likely to have performed worse than indicated by the percentage change since IPO. As one example, Dutch Brothers is showing the highest gain since IPO of 127% based on an offer price of $23. But, the stock traded between $32 and $40 on its first day, so an attainable gain would be somewhere between 30% and 45%.  Not bad, but also not 127%.

The collective market cap of all the companies at their 52-week high totaled approximately $1.15 trillion. As of today, that total stands at $420 billion. If we look at the number of days that passed between the IPO and 52-week high, there doesn’t appear to be any reliable pattern. Some companies had strong returns for several months following their IPO, while others started crashing soon after.

As we’ve covered extensively in recent articles, chasing trendy investments—whether stocks or themes—rarely works out in the long term.

When Brighton Jones clients asked in 2020 what equities and strategies we should buy with new dollars, our response was more of the same strategies we already own. Just because the world changes over time, doesn’t mean your investment strategy should.

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Whether you have a specific question, or you’re interested in learning more about how our approach can be tailored to your situation, we’d love to hear from you.