Mar 4, 2021
We’ve previously compared IPOs to lotteries that are prone to
inflated valuations and low returns. Today we welcome “Mr. IPO,”
Professor Jay Ritter onto the show for a deeper dive into IPO
performance, for his insights into SPACs, and to hear his research
into why economic growth doesn’t correlate with stock returns.
Early in the episode, Jay unpacks how long-term IPO returns perform
against first-day trading. While exploring the role that venture
capital plays in tech IPOs, Jay talks about why negative earnings
don’t affect tech IPOs in the short-term before sharing how
skewness factors tend to impact young companies. Reflecting on how
IPOs are usually underpriced, Jay discusses how the interests of
companies are not aligned with the interests of IPO underwriters.
After looking into IPO allocation, Jay compares the 2020 ‘hot IPO
market’ with the internet bubble of the late 90s. Later, we ask Jay
about what special-purpose acquisition companies (SPACs) are and
why they’ve exploded in recent years. His answers highlight their
investing benefits, risks, and why SPACs might be a better option
for companies than IPOs. We examine how SPACs have historically
performed and then jump into our next topic; why economic growth
isn’t a good indicator that a country is worth investing in. He
touches on why returns don’t correlate with economic growth, the
place of capital gains and dividend yields when investing abroad,
and how innovations in an industry can lead to higher stock
returns. We wrap up our conversation by asking Jay for his take on
whether the stock market is efficient before hearing how he defines
success in his life. Tune in to hear our incredible and informative
talk with Jay Ritter.
Key Points From This Episode:
- Introducing today’s guest, finance professor Jay Ritter.
- How long-run returns of IPOs perform against the first trading
- Industry differences in IPO returns and how venture capital
affects tech IPOs. [0:03:33]
- Why it’s not always a bad idea to invest in IPOs.
- Whether negative earnings for tech companies affect IPO
- Exploring the idea of skewness in IPO valuations and returns.
- Jay shares advice on investing in IPOs.
- Why IPOs tend to be underpriced.
- Whether individuals get IPO allocations compared with hedge
funds and brokerages. [0:18:00]
- The factors that lead to ‘hot IPO markets.’
- How technical innovation is linked to an increase in IPOs.
- Whether hot IPO markets tell us anything about future expected
- Why 2020 was a hot IPO market and how it compares with the late
- The dubious value of individual investors getting exposure in
the private market. [0:30:50]
- Jay unpacks what special purpose acquisition companies (SPACs)
- How new SPAC prices are rising despite not having acquired an
operating company. [0:37:11]
- Ways that promoters benefit from launching SPACs.
- Whether SPACs are a better route for going public than
traditional IPOs. [0:42:44]
- We talk about the risks and historical performance of SPAC
- Jay details the upsides and downsides of investing in SPACs.
- Insights into which foreign countries have been the best to
invest in. [0:50:11]
- How industry growth can lead to higher returns in that
- What Jay uses to work out expected stock returns.
- We ask Jay the big question; “Is the stock market efficient?”
- Hear how Jay defines success in his life.