Mike’s note: In today’s essay, Larry takes you back to one of the most dangerous times to be an investor in decades… the dot-com bubble.
It was an exciting time in the market. And, while a lot of people were making money on IPOs, Larry says it’s not the best place to put your money anymore. (In fact, anyone looking to trade the market profitably should see how he completed his trading challenge to learn the best way.)
Read on to learn how Larry, then a Wall Street insider trader, was able to take advantage of such a chaotic time… And why these days, you should stay far away from most new companies coming public…
The IPO Opportunity Just Isn’t What it Used to Be…
By Larry Benedict, Editor, The Opportunistic Trader
Today I want to talk about one of the most volatile, profitable eras for trading the market I’ve ever seen… The dot-com bubble of 1999 and 2000.
Back then, IPOs were the hot thing. And almost all of them were tech companies.
But I struggle to even call them “companies.” They were making no earnings, no revenue… Some of them probably didn’t even have offices.
At that time, I ran the charitable trust account for Spear, Leeds, and Kellogg. Much like my recent Trade-a-Thon, we were trading for all proceeds to go to charity.
Thanks to our connections, we were able to get shares in companies before they went public on the open market. And when they did go public, they opened up multiples higher than their IPO price. And there were at least 10 of them a week.
Our strategy for trading this was simple. We sold our pre-IPO shares right after the initial pop higher on the day they went public, and made a decent return. And we did that over and over.
The market was unfair for the average investor in that time… The folks who couldn’t get their hands on pre-IPO shares wound up buying these companies for far too much. In many cases, that initial pop – where most average investors were buying – was the highest price those stocks would ever trade at.
Pair that with the mania in technology companies, and how much money was changing hands, and you had a bubble.
It was a tough time to be an investor…
But for savvy traders, it was a goldmine.
My Biggest Dot-Com Bubble Trade
The best trade from that era was on a company called 3COM…
3COM owned Palm Pilot (PALM) – the old PDA maker. And because they did, everyone who owned 3COM stock back then would get stock in PALM.
PALM was one of the hottest IPOs of 2000. It was so popular, the market was valuing 3COM, its parent company, for less than its stake in PALM alone.
That’s all thanks to the tech bubble… The PDA fad was in, and PALM seemed revolutionary.
So, the big play in trader circles was to be short 3COM, because of how the market was valuing it… and because you got stock in PALM for free, helping cover potential losses.
The day of the IPO, PALM opened at about $80 per share after being priced at $38 the night before. So we made $80 on the PALM IPO, which we sold on the opening. Then we shorted 3COM as part of the trade because we knew 3COM would probably go down.
3COM fell 21% on the day. This company had a 90% stake in PALM. And its market cap wound up lower than the value of that stake…
We made $30 on our short and $80 on our long. It was one of the best trades we had at the time. And I’ve never seen anything like it to this day.
Can You Take Advantage?
These were basic trades, and highly profitable, but the average investor just couldn’t make them. Retail investors could only pay good prices on the smallest IPOs, and not like big brokerages can. Nowadays, it’s unfortunately not much different.
So, how should someone trade an IPO today?
You must be careful not to buy an IPO that’s up significantly on the open… because insiders get the syndicate price and can sell for a profit quickly.
Let’s say Beyond Meat came in at $40. Insider traders get it at $35… And the first trade on the IPO is $41. So, most people are already at a massive disadvantage if they’re buying at the open.
It’s best to watch an IPO for the first week or so. Oftentimes, the price comes down as insiders and connected traders sell their shares – offering a better entry point for the average investor. This also happens often at the lockup expiration, usually 3-6 months after the IPO.
The markets are different now, though. There’s more money involved than ever before – squeezing out the little guy.
And a bigger problem is a lot of today’s companies go public at billion-dollar valuations. Where’s it going? It’s already worth $10 billion… And the first $10 billion is supposed to be the hardest to get.
Back in the ‘80s, Microsoft came around with virtually no market cap, and you were able to get in on something huge that grew from infancy. Those opportunities just aren’t around anymore.
For the average investor who wants to trade IPOs, look into the valuation of any IPO before making a decision. And refrain from buying it right at the opening… The hype tends not to stick.
Or, just stay away altogether… There’s plenty easier money to be made trading elsewhere.
Editor, The Opportunistic Trader
P.S. I’ve traded all different types of markets in my 35-year career. And I think, for the average investor, IPOs are not the best place to be.
But options are…
When traded the right way, options provide far less risk than stocks… with greater short-term rewards. (Here’s the proof… I recently made over $100,000 trading options, in a single session, to donate to a local charity.)
In Case You Missed It…
Over 100,000 people registered (enough people to sell out Michigan Stadium)…
They signed up to see if trading legend Larry Benedict could generate $70,000 in just a few hours of trading.
Care to guess what happened?
Spoiler: He won. But make sure you watch the show to see exactly how much he generated, and how he did it.