What investors can learn from Snap’s flotation

Stocktake: Being patient can pay off even when looking at the hottest new stocks

 The Wall Street bull: What if this current bull market isn’t as old as it looks.  Photograph:  Spencer Platt/Getty Images

The Wall Street bull: What if this current bull market isn’t as old as it looks. Photograph: Spencer Platt/Getty Images

 

Initial public offerings (IPOs) tend to attract green folk looking to make a bundle by buying into the “next big thing”, but it can be a stressful business, as Snap enthusiasts are finding out.

The stock, which sports an eye-watering valuation, quickly fell by almost 30 per cent from its post-IPO highs. Such falls are not uncommon. Looking at 10 high-profile tech IPOs in recent years, blogger and Ritholtz Wealth Management strategist Ben Carlson noted that eight had suffered major falls ranging from 27 to 80 per cent. The only stocks to buck the trend were Facebook and Alibaba, which gained 261 and 52 per cent respectively.

However, actual returns are even worse. Snap’s offering price was $17, but demand for the stock saw it open for trading at $24. This is the norm – ordinary investors rarely get to buy at the offer price. Alibaba’s aforementioned gains are almost entirely wiped out if one factors in the opening-day pop, leaving Facebook as the sole winner of note.

The moral is that would-be IPO investors should be patient rather than buying on the first day’s trading – lower prices are usually a question of when, not if.

Bull market

The US bull market celebrated its eighth birthday last week, sparking no shortage of debate as to whether this elderly rally – the second-longest in history – can continue to defy Father Time. But what if this apparently ancient bull isn’t as old as it looks?

The most common definition of a bear market is a 20 per cent decline. The S&P 500 fell 19.4 per cent between May and October in 2011. Should that not qualify? What about the fact that at its intra-day low on October 4th, the index had fallen by 21.6 per cent?

Others argue that the 15 per cent correction that occurred between May 2015 and February 2016 was a bear market in all but name. Almost two-thirds of stocks fell by more than 20 per cent; the average stock fell by 34 per cent; indices went nowhere over an 18-month period; sentiment among ordinary investors was even lower than that seen in March 2003 and March 2009, at the tail end of two major bear markets.

One final point: the MSCI World Index fell into official bear market territory in 2011 and again in early 2016.

The moral? Don’t be too cocky as to when the bull market is going to end – not when you don’t even know for sure when it started.

Market strength

The suggestion that there is plenty life left in the current bull market is advanced by technical analysts at Oppenheimer Asset Management, who are encouraged by the market strength shown in recent months.

The S&P 500’s weekly relative strength index (RSI), a widely-followed momentum gauge, recently exceeded 75 – an extremely high reading indicating markets are technically overbought. Far from being bearish, such momentum is usually seen in the early stages of a new advance, says Oppenheimer, with above-average returns typically following over the next six months. The sectors leading the market higher – financials, technology and industrials – are also indicative of a bull market in its early stages, the firm says.

Still, StockTake is more inclined to see the ongoing advance as late-stage bull market behaviour – the “terminal phase of the cycle”, as Barclays puts it, when investors need to be “extra vigilant to signs of recession risk”.

Sentiment tends to get heady during these “high-conviction” phases, but don’t assume it’s time to start selling up, this phase of the economic cycle “can last several years and is most often characterised by stocks strongly outperforming bonds”, says Barclays.

Further gains

Stocks are not “cheap by any stretch”, hedge fund billionaire David Tepper said last week, but “animal spirits” and accommodative global monetary policy means there is “very little to get in the way” of further gains.

You can’t short the market “when the punch bowl’s still full”, said Tepper, referring to the “sugar that is still being put on” by central bankers in Europe and Japan. To sceptics, that might sound eerily reminiscent of Citigroup chief executive Chuck Prince, who famously said in July 2007 that you’ve “got to get up and dance” when the music’s playing, adding: “We’re still dancing”. The music stopped within months as the global financial crisis took hold.

Tepper is not Prince, however. One of the most successful investors in history, he has bagged gross annual returns of more than 30 per cent over the past two decades.

That doesn’t mean he is right, but it’s worth noting when contrarian investors like Tepper caution against fighting the trend. Be cautious about going against the herd, as George Soros once said, you are liable to be trampled on.

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