How ‘insiders’ turn $5,000 into $2.4 million
- The very best IPOs tend to be for insiders only
- Bigger than Chicago
- How Australia rates
First of all, you MUST watch this.
Our head of research, Greg Canavan, has been beavering away on a fascinating project for the last two years.
We sat down yesterday for a chat. He shared with me some of what he has found. You can watch our conversation here. (Don’t worry, it’s not one of those long sales videos.)
You’ll see that the goal of Greg’s new project is…shall we say…a tad ambitious. It’s to see if ordinary investors can get ‘special access shares’ to new companies floating on the ASX.
Seems like an impossible task to me.
Everyone ‘knows’ IPOs are rigged to benefit insiders. (That’s what I thought, anyway.)
But it appears Greg might have found an ‘in’. More here.
The conversation left us pondering this question: Is it really possible to turn just $5,000 into nearly two-and-a-half MILLION dollars?
The answer, in case you’re wondering, is ‘yes’. It’s possible.
But, in my view, in order to have the best chance of achieving it, you have to be an ‘insider’.
Take this nugget of info that Greg shared with me in our video conversation. Amazon is 20 years old this month. When Amazon first went public in 1997, its initial public offering stock was priced at US$18 per share.
Taking into account the stock splits over the past 20 years, the adjusted IPO price is US$1.50. Last night, the Amazon.com [NASDAQ:AMZN] share price closed at US$970.67.
For an investor who bought in at the IPO, and who continued to hold the shares, they would have made a 64,611% gain on the stock.
It means that just US$100 invested in the Amazon IPO would be worth…wait for it…more than US$64,000 today. US$1,000 of freshly-minted Amazon stock would now be worth more than US$646,000. Enough to buy an Amazon Prime membership for 6,460 years, according to CNN.
And if you’d REALLY pushed the boat out and invested US$5,000 in the Amazon IPO? It’d be worth a cool $2.4mln. (That’s all adjusted for stock splits.)
$5,000 into $2.4mln.
Remarkable. I think you’d agree.
But, in reality, very few ordinary folks like you were able to get a piece of the action back then. That was then. And that’s about to change. More in a moment. First…
Overnight, the Dow Jones Industrial Average gained 89.99 points, or 0.43%.
The S&P 500 added 12.29 points, for a 0.52% rise.
In Europe, the Euro Stoxx 50 index fell 10.48 points, or 0.29%. Meanwhile, the FTSE 100 gained 0.34%, and Germany’s DAX index fell 0.15%.
In Asian markets, Japan’s Nikkei 225 index is down 12.33 points, or 0.06%. China’s CSI 300 is up 0.35%.
In Australia, the S&P/ASX 200 is down 8.21 points, or 0.14%.
On the commodities markets, West Texas Intermediate crude oil is US$50.91 per barrel. Brent crude is US$53.64 per barrel.
Gold is trading for US$1,262.16 (AU$1,684.17) per troy ounce. Silver is US$17.16 (AU$22.91) per troy ounce.
The Aussie dollar is worth 74.92 US cents.
The very best IPOs tend to be for insiders only
Back to IPOs. So, why don’t most ordinary folks get access to the best IPOs?
For a start, if we continue with the Amazon example, it simply wasn’t on people’s radar back in 1997. The company only started in 1995. It was a little upstart from Seattle — nipping at the heels of bricks-and-mortar booksellers like Barnes and Noble.
Even if you were keen to get a piece of the action, you would have had a hard time getting shares. There wasn’t a lot of the stock to go around. The company’s IPO raised just $54mln, for a market value of about US$440mln, at the time. (By the way, today the company is worth US$460bn.)
Finally, most IPOs are pulled off for the benefit of insiders. In the very best issues, the early spoils go to the insiders and their friends.
First dibs go to company insiders, directors, officers and early backers…second dibs go to institutional investors…third dibs (sometimes) to company employees…
…then, finally, you, the retail investor. If you’re lucky, you get to fight over the scraps.
For instance, Jeff Bezos and his family initially stumped up US$300k. (The best $300k he’s ever spent, that’s for sure…) Then there was a further US$100,000 investment from Tom Alberg). According to In One Click: Jeff Bezos and the Rise of Amazon.com, Bezos raised US$981k in 1995 from 20–23 angel investors. When that money ran out in June 1996, venture capital firm KPCB put in US$8mln.
The point is: There was a long, long list of people who were due preferential treatment when IPO shares were dished out on 15 May 1997.
So a lot of the articles this month on ‘How Much You Could Have Made on the Amazon IPO’ are misleading. Including, in all honesty, the numbers I’ve given you above.
It would have been great if you could have turned $100 into $64,000, or $1,000 into $646,000, or $10,000 into $6.5mln…but the reality is that even if you had the foresight at the time to predict Amazon’s growth, you still probably wouldn’t have been able to snap up any of the IPO shares.
That’s because very few of us mere mortal investors can get that close to the best deals.
As Charles Pain writes in a Smart Talk article called ‘How to Beat a “Rigged” Stock Market in 3 Easy Steps’:
‘Whenever an exciting or well-known company debuts on a major stock exchange, investors take notice. This is frankly a shame. The mechanism by which new issues are foisted on the public is among the most conflicted and downright shadiest arrangements on Wall Street.
‘Too often, the syndicates that control initial public offerings (IPOs) strategically underprice the deal so that only their preferred clients make the big money — sometimes at the expense of the offered company itself! Even if the deal is priced fairly, so-called retail investors who buy the shares at the open get a bad shake.
‘Similar to the high frequency trading Michael Lewis “revealed,” this is no secret on Wall Street. Everybody knows that IPOs are a raw deal for retail investors; it’s simply business as usual.’
A great example of how insiders get the spoils and ordinary chumps get a ‘bad shake’ is Amazon’s Chinese equivalent, Alibaba.
It was the biggest IPO in US history, raising over US$21.8bn.
But, as pointed out by thinkprogress.org:
‘Before the bell rang, Alibaba sold its shares at $68 to a variety of hedge funds, mutual funds and other well-connected investors. By the time ordinary investors had a chance to buy the stock, it was trading at $92.70. The privileged few were able to turn an immediate profit of 36 percent, if they so chose.
‘When companies issue an I.P.O., they partner with one or more “underwriters”—often investment banks—that go out and find investors for the company. These underwriters get paid a fee from the company for their service. In the case of Alibaba, the fee totalled more than $200mln. But underwriters are also able to use that position to provide access to the I.P.O. to favored clients, securing their business and generating more fees.
‘The underwriters’ dual loyalties—to the company offering the I.P.O., and to their investor clients—is an inherent conflict that is rife for abuse.’
If you’ll pardon the expression, that sucks.
As you can see in my talk with Greg yesterday, it is possible to make super-quick, super-big gains if you can get access to the best IPOs.
Is there a way you can dip your toe into this market without getting a ‘bad shake’?
Is there a way for you to get into these deals at the same level as the ‘privileged few’?
There may just be…
OK, enough of the teasing. I’ll just come straight out and say it: Yes, I believe there is a way for regular investors to get in on the best IPO deals. Exactly how, I’ll explain more later this week.
Bigger than Chicago
Speaking of big IPOs, check out this list from MarketWatch:
Click to enlarge
It compares the market capitalisation of five of the world’s biggest listed companies to six of the biggest US cities.
If Apple Inc. [NASDAQ:AAPL] and Google were ‘cities’, they would rank as the third and fourth biggest in the US…both ahead of Chicago.
Of course, they aren’t cities. And it’s arguable whether such a comparison is valid. But the biggest takeaway from this list of US stocks is how relatively new each of these businesses are.
The oldest is just 42 years old. The youngest was incorporated as recently as 2004.
(Quiz: Can you list each of those five tech businesses in order from the date of their incorporation, oldest to youngest? Answer at the bottom of this email. No cheating.)
What does that tell you? Among other things, it shows you how new companies and investment opportunities can seemingly emerge from nowhere.
It shows that you don’t only have to invest in old and well-established companies in order to make a big killing on stocks. You can invest or speculate on young, upstart companies too. The type of companies that may one day, in the not-too-distant future, turn into corporate giants.
Yes, it’s true that some companies can take longer than others to really hit the big time. But that’s OK. If you’ve backed the right idea, what’s the rush? Get in at the right time, and hold on.
I’m certain that if I asked him, that would be Greg’s message too.
How Australia rates
Out of interest, where would Australia’s cities stack up in terms of GDP?
Each year, SGS Economics & Planning produces a report detailing GDP for Australia’s capital cities and regions.
Here’s how the capital cities fared in 2015–16:
- Sydney GDP — $400.9bn
- Melbourne GDP — $303.5bn
- Brisbane GDP — $157.9bn
- Perth GDP — $148.6bn
- Adelaide GDP — $78.2bn
Based on those numbers, Sydney would rate just below JP Morgan Chase & Co [NYSE:JPM], which has a market capitalisation of US$301bn (approximately AU$401bn).
Melbourne would rank just below Bank of America Corp [NYSE:BAC], which has a market cap of US$229bn (AU$305bn).
Of course, compared to the Australian market, Sydney, Melbourne, Brisbane and Perth would rank at the top of the list if they were matched against the market cap of ASX-listed stocks.
The ASX’s current biggest stock is Commonwealth Bank of Australia [ASX:CBA], which has a market cap of $140.6bn.
We’re not sure what that says about the top end of the Aussie market exactly, but we do know that it means there are plenty of opportunities at the other end, in small-caps. Perhaps even the best place to be when it comes to IPO opportunities.
Remember to check out that video of me with Greg Canavan. Go here.
Quiz Answer: Microsoft Corporation — April 1975; Apple Inc. — April 1976; Amazon.com Inc. — July 1994; Google Inc. — September 1998; Facebook Inc. — February 2004.
Bonus point if you knew that a restructuring of Google Inc. in October 2015 resulted in the creation of Alphabet Inc. as Google’s new parent company.