Every year in fantasy football, teams go out on a limb and draft rookies who have the potential to have a big impact on their team. In 2014, Carlos Hyde, Bishop Sankey, Brandin Cooks, Devonta Freeman, and Mike Evans were all rookies that were drafted in virtually all fantasy football drafts. However, it's quite likely, none of these players were drafted before the fifth round. What does this mean? It means most fantasy teams formed a foundation for their teams with solid, proven players before they took the risk of adding an unproven rookie to their roster, no matter what their potential was. Why? Because they could be busts, they might not see the field (many rookies play behind veterans), or their playing time could be limited (for a myriad of reasons). However, many teams still draft these rookies and put them on their bench until it is better known how they will be utilized and what their effect will be across the greater team.
This same approach can be taken with IPOs. However, instead of adding these rookie companies immediately to your portfolio, wait and see how the companies will perform. That is, keep them on the bench before you include them in your starting lineup. The products and services these companies offer may not be well received in the market place. Or, their competition may respond in such a way that may put the rookie company in dire straits.
This is not to say ignore IPOs and never add them to your portfolio. It is to say, let them prove their worth first. Make sure they demonstrate big gains in sales and earnings per share. While it might seem you are missing out on huge gains by not buying stock immediately, those "gains" pale in comparison to the potential losses for buying stock in a company that will fail. Good, strong companies will continue to grow in great strides beyond their first six months since issuing stock. Case in point, GOOG went public in August 2004. In its first six months, it grew 72%. While this might seem like a huge missed opportunity, GOOG grew by another 43% in their second six months, which is still huge.
BNNY went public in April 2012 and went up 29% in its first six months, then preceded to fall 15% in their second six months. BNNY's next big performance spike didn't come until September 2014, when it was bought by GIS.
Remember, the stock market is a fantasy football league of one and the objective is to grow your portfolio over a long period of time. Not just in short spurts. You can pick any stock to put in your portfolio, why not put the best stocks in your portfolio? And when another company is showing better, more consistent performance than one in your portfolio, that's the time to make a substitution.
I want to revisit this analogy later when I have time to research it, but I want to compare rookies drafted in fantasy football versus IPOs. I have a feeling there are many similarities between rookie who make NFL careers or bust versus IPOs that perform well over several years or just sputter and fade.
This same approach can be taken with IPOs. However, instead of adding these rookie companies immediately to your portfolio, wait and see how the companies will perform. That is, keep them on the bench before you include them in your starting lineup. The products and services these companies offer may not be well received in the market place. Or, their competition may respond in such a way that may put the rookie company in dire straits.
This is not to say ignore IPOs and never add them to your portfolio. It is to say, let them prove their worth first. Make sure they demonstrate big gains in sales and earnings per share. While it might seem you are missing out on huge gains by not buying stock immediately, those "gains" pale in comparison to the potential losses for buying stock in a company that will fail. Good, strong companies will continue to grow in great strides beyond their first six months since issuing stock. Case in point, GOOG went public in August 2004. In its first six months, it grew 72%. While this might seem like a huge missed opportunity, GOOG grew by another 43% in their second six months, which is still huge.
BNNY went public in April 2012 and went up 29% in its first six months, then preceded to fall 15% in their second six months. BNNY's next big performance spike didn't come until September 2014, when it was bought by GIS.
Remember, the stock market is a fantasy football league of one and the objective is to grow your portfolio over a long period of time. Not just in short spurts. You can pick any stock to put in your portfolio, why not put the best stocks in your portfolio? And when another company is showing better, more consistent performance than one in your portfolio, that's the time to make a substitution.
I want to revisit this analogy later when I have time to research it, but I want to compare rookies drafted in fantasy football versus IPOs. I have a feeling there are many similarities between rookie who make NFL careers or bust versus IPOs that perform well over several years or just sputter and fade.
No comments:
Post a Comment