Initial public offerings (IPOs). A good short-selling bet?

University of Florida professor Jay Ritter has as much information on IPOs as anyone would want to see. Take a look at his website.

During the 35 years from 1980 to 2015, over 8,000 IPOs where launched. The first-day returns ranged from 9.5% to 28.4% with an average of 18% and not a single loss. Not one! All of us know of people who made fortunes by investing early in Facebook, Amazon, Apple, Netflix, Google or Tesla.

Launched just a few days ago, the most recent examples of IPOs are Levi Strass (symbol LEVI)  and Lyft (symbol LYFT). We can expect similar performance from them.

So, how can we take advantage of the predictably positive IPO first-day returns? The most common way is to be involved with the creation and the development of a company before it goes public. That usually takes years and years of total commitment. There are other simpler ways but none is straightforward.

Other highly predictable outcomes are the negative three-year returns on most of these IPOs. The over 8,000 IPO’s we mentioned above had negative three-year returns ranging from -1.9% to -44.6% with an average of -18.7% with almost no positive returns. Almost none!

A much simpler way then is to bet on the almost certain three-year negative returns by short-selling the security in question.

What is short-selling? How do we sell short? Can we sell short in a tax-advantaged account?

Dr. Milan Somborac
