Benjamin Felix

And then investing in the shares once they're listed on the public market has been rough to say the least.

They're the sort of consistent pattern of IPO underperformance, even as a name, named by Jay Ritter, who's also been a guest on this podcast.

They called it in a 1995 paper, the new issues puzzle.

They had looked at companies issuing stock.

This is IPOs, but also seasoned equity offerings.

Companies issuing stock from 1970 to 1990 tended to be poor investments.

In this paper, they find that investors and IPOs receive average returns of only 5% per year, while similar listed firms return 12% over the same period.

The paper notes that to achieve the same wealth five years later, an investor would have had to put 44% more money

into new issues in the sample than into established firms of the same size.

Pretty crazy.

And hope that they're right.

Yeah, I guess that's true.

That is a good point.

That's data ending in the 90s.

And there's a more recent 2019 study from Dimensional Fund Advisors where they looked at the first year secondary market performance of more than 6,000 IPOs from 1991 to 2018.

So that actually does pick up right where Jay Ritter's sample ends.

And they find that a portfolio of IPOs generally underperform the market and the small cap index by about 2% per year.

The main exception is the 1992 to 2000 period when the IPO portfolio outperformed the small cap index by about 1.1% annually.

And that was mainly due to IPOs consisting of small tech companies that their prices took off during the dot-com boom.

But we all know what happened after that.