Tilting the Odds When IPOs Tempt

Alee Rose

IPOs often start strong but struggle to outperform over time. We examine recent examples and explain why skipping IPOs have been another small, repeatable edge for long-term investors to capture.

Contributed by Doug Walters, David Lemire, Max Berkovich, Matthew Johnson

I get it. The emotional draw of an IPO is real. A compelling story, a well-known brand, and the allure of “getting in early” can create a powerful pull. And this year we’ve had some big ones… first Cerebras Systems and then SpaceX. But IPOs have proven to be an avoidable tax on portfolio performance, and those who steer clear have an opportunity to give themselves a compoundable advantage.

Recent history

Cerebras Systems, the first “must-have” IPO of the year, launched in May and is down 36% since then. This month, SpaceX went public, with shares surging roughly 33% through the first two full days of trading, only to reverse course shortly thereafter. From the peak on day three, the stock is down 31% and is now approaching its initial day-one indication of $150.

A familiar pattern

We wrote about the long-term data on IPOs in our article The Trouble with Hot IPOs. The evidence is quite clear. While IPOs often generate strong initial returns, they tend to underperform from their first day of trading over longer horizons. The early gains are frequently driven by a combination of scarcity, narrative momentum, and investor enthusiasm. Over time, those factors give way to fundamentals, valuations, and more normalized expectations.

Another marginal gain

For us, as evidence-based investors, we see a compelling opportunity. We are not interested in trying to capture some elusive unicorn. Instead, we seek identifiable, repeatable edges that can reliably compound returns over time. This is where our thinking aligns with the concept of marginal gains, which we discussed in Take Your Portfolio from Middling to Winning. The idea is simple. Instead of searching for a single transformative move, we look for incremental advantages that, when combined, meaningfully improve outcomes.

Avoiding IPOs is one of those advantages. Taking a pass on them can feel like missing out, especially when prices are rising quickly. But the data suggests that, on average, investors are paying a premium for that excitement. By stepping aside, we are effectively declining to participate in a segment of the market that has historically offered less favorable risk-adjusted returns.

Tilting the odds

In isolation, an IPO decision is unlikely to define a portfolio’s success. But when combined with other disciplined choices such as tax-aware implementation, factor investing, thoughtful diversification, and opportunistic rebalancing, it becomes part of a broader framework designed to tilt the odds in the investor’s favor.

The recent experiences with Cerebras and SpaceX illustrate this dynamic well. As initial enthusiasm faded, the stocks began to retrace. This does not mean the companies lack merit. They may yet turn into unicorns. But history shows that the timing and pricing of public entry often reflect peak optimism.

More temptation to come

With OpenAI and Anthropic likely to go public this year, investors will face more temptation. Our job is not to chase optimism. It is to assess where we can add value. Avoiding IPOs will not always feel good. But as part of a disciplined, evidence-based approach, it represents one more incremental step toward better long-term outcomes.

In gambling and investing, the first step is to determine if you have an edge. If you don’t, don’t play.
Ed Thorp

One thing to watch

Micron (MU) will provide another glimpse into the direction of the AI infrastructure investment cycle on Wednesday. For factor investors like us, Micron has been in the enviable position of driving up both Value and Momentum strategies with exceptional performance. It can seem paradoxical that a Momentum strategy would hold Value names, but that is exactly what happens when Value holdings take off.

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