Noel and I have been fielding more questions about newly public companies than just about any other topic lately — and it’s not hard to see why. There is a certain electricity in the air when a company goes public during a technology boom. We saw it with the dot-com era. We saw it with social media. And right now, with artificial intelligence dominating every financial headline, we are seeing it again.
The story is always the same: a transformative technology appears, excitement builds, companies rush to go public, and investors — afraid of missing out — rush to buy. Some get rich. Most do not. The ones who lose the most are almost always ordinary investors who believed the hype. This is not about whether AI will change the world — it probably will, and as someone who uses it daily I am genuinely excited about it. This is about why that fact alone does not make AI IPOs a good investment.
“An IPO is like a negotiated transaction — the seller chooses when to come to market, and that’s typically when the conditions are most favorable to the seller, not the buyer.”
— Warren Buffett
An IPO is simply the first time a company’s stock is made available to the public. On paper it sounds like a golden opportunity — get in early on the next great company. The appeal is real: if you had bought 100 shares of Microsoft at its IPO in 1986, your $2,100 investment would be worth $12,000,000 today. Stories like that are powerful. They create what psychologists Kahneman and Tversky called availability bias — we judge the likelihood of an outcome not by how often it actually occurs, but by how vivid the examples in our memory are. We remember the winners. We forget the thousands of companies that went public, peaked on day one, and quietly collapsed.
The research is sobering. Finance professors Jay Ritter and Ivo Welch found that from 1980 through 2001, buying the average IPO at its first public closing price and holding for three years left investors underperforming the broader market by more than 23 percentage points annually. The excitement surrounding an IPO is often the very reason it is a poor investment.
Every conversation I have about newly public companies follows the same script. Someone leads with “They have so much potential” or “They’re planning to put data centers in space and harness the power of the sun — there’s no way they won’t be profitable.” The story sounds compelling every time. It sounded compelling in 1999, too.
No story illustrates the danger more vividly than VA Linux — a tech company rumored to give Microsoft a run for its money that went public on December 9, 1999 at the peak of the dot-com frenzy. The stock was priced at $30. Demand was so ferocious that when NASDAQ opened, not a single early investor would sell below $299. It peaked at $320 and closed at $239.25 — a gain of 697.5% in a single trading session. Message boards erupted: “LNUX: THE NEXT MSFT” and “BUY NOW, AND RETIRE IN FIVE YEARS FROM NOW.”
Here is what the cheerleaders were not talking about: VA Linux had sold a cumulative total of $44 million in software over five years — and lost $25 million doing it. At peak, investors were valuing this money-losing startup at $12.7 billion. As Jason Zweig asks in his commentary on The Intelligent Investor: if your neighbor leaned over the fence and asked you to buy his struggling business — already $30 million in the hole — for $12.7 billion, would you say “Sounds about right”? Or would you turn back to your barbecue and wonder what he’d been smoking? Three years to the day after that euphoric opening, VA Linux closed at $1.19 per share.
“Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”
— Benjamin Graham, The Intelligent Investor
The Tractor, The Airplane, The Internet, now AI. Every generation has its world-changing technology — and every generation has investors who confuse a great technology with a great investment. There was recently a shoe company that announced it was pivoting to AI. Its stock rose 500% in a single day. That actually happened — and it tells you everything you need to know about where we are right now.
Here is the principle worth keeping near your investment accounts: the more enthusiastic the public becomes about a technology, and the faster that enthusiasm grows compared to actual growth in the underlying business, the riskier the proposition becomes. Think of it as a rubber band stretched between two posts. One post is the stock price — pulled higher by excitement and momentum. The other is the underlying business — moving forward on revenues and cash flow. The further apart they stretch, the more violent the snap back. Graham called this the margin of safety. Buffett made the same point in his 1982 shareholder letter: a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments. Ten years of a great business — wiped out because you paid too much on day one.
“A great company is not a great investment if you pay too much for the stock.”
— Benjamin Graham (1965)
There is one more structural problem most investors never learn about: the biggest first-day gains on IPOs are almost exclusively captured by institutional investors — the large banks and fund houses that receive shares at the initial offering price before the stock ever begins public trading. By the time you can buy, those gains have already been made by someone else. You are not buying at the price that made early investors rich. You are buying from them, at whatever price they are willing to sell. Zweig put it plainly — IPO does not just stand for “initial public offering.” It is also shorthand for:
What “IPO” Really Stands For (According to the Evidence)
• It’s Probably Overpriced
• Imaginary Profits Only
• Insiders’ Private Opportunity
• Idiotic, Preposterous, and Outrageous
I’ll be the first to admit I’m as excited about AI as anyone — I use it almost daily and see what it can do firsthand. But the investors who built real, lasting wealth did not do it by chasing the hottest stories of their day. They patiently identified businesses with durable competitive advantages, bought them at reasonable prices, and held long enough for the value to compound. The AI era will have its Microsofts. It will also have its VA Linuxes. As of this writing on June 7th, we are already seeing the early unwinding of some of these sectors — something we called in our latest ProVest Pulse, Episode 5. The profitable investor does not need to be first. They need to be right.
“The stock market is a device for transferring money from the impatient to the patient.”
— Warren Buffett
Before You Invest in Any Hyped IPO, Ask Yourself:
• Is the company actually profitable, or burning cash in hopes of future revenue?
• What flawless future performance does the current valuation assume?
• Am I buying because it’s good value, or because everyone else is excited?
• If this were a private business my neighbor owned, would I still pay this price?
• Can I hold this calmly for 5–10 years if the hype cycle reverses?
— Gabriel J. Lopez
