Today, one group of investors doubled their money. Another group took a whopping 20% loss. That's not all that unusual -- except that all of those folks were investing in the same stock.
The debut of LinkedIn (NYSE: LNKD ) certainly didn't disappoint thrill-seeking IPO followers. Having raised its offering price to $45, the stock opened around $83 and rose as high as $122 before falling back to close at $94.25. The price action brought comparisons to the tech boom of the 1990s, and led to arguments about whether the offering would open the door to a flood of social-networking companies trying to cash in by going public.
The answer to that question is an unqualified yes. In fact, it's already happening.
Betting on the social media revolution
With the success of LinkedIn's offering, you can count on interest in privately held social media companies only getting more intense. Already, the trading of stocks that haven't yet gone public has gained in popularity, with estimated trade volume that could hit almost $7 billion. Whether it's through private-company exchange facilitators like SharesPost and SecondMarket, or pooled investment vehicles that concentrate accredited investor money into a single stock, high-net-worth individuals are demanding access to hot stocks before they get to the general public.
In fact, demand is so strong that companies risk a public-relations nightmare if they fail to deliver. When Goldman Sachs (NYSE: GS ) closed the doors on a planned offering of Facebook shares to U.S. investors, the deal blew up in its face, turning what would have been goodwill at giving exclusive access to the popular website's shares into anger at being shut out. JPMorgan Chase (NYSE: JPM ) has also made moves to start a fund that could potentially give investors exposure to "late-stage" private companies like Groupon and Twitter.
In contrast to U.S. social media companies, which have been shy to go public, Chinese companies haven't hesitated to cash in with IPOs. Just look at the first-day performance for IPOs there, including Youku (NYSE: YOKU ) , dubbed China's YouTube; E-Commerce China Dangdang (NYSE: DANG ) ("China's Amazon"); and Renren (NYSE: RENN ) ("China's Facebook") -- even if several of those stocks haven't done nearly as well in ensuing trading.
It's also important to observe that this phenomenon isn't limited to high-profile startups. For evidence of the health of day-trading, look no further than Jammin Java, a tiny company with ties to relatives of reggae star Bob Marley. Despite having no reported revenue and consistent losses, the company recently saw its shares jump from $0.17 as recently as late December to more than $6 a week ago, only then to fall to below $1 on Wednesday. The shares closed at $2.30 yesterday on volume of more than 20 million shares -- on a stock that traded only 200 shares during the entire four months from August to November last year.
How to think long-term
The hardest advice to follow with these offerings may also be the best: Ignore them, with the expectation that you'll get a second chance at the shares down the road at a cheaper price.
Certainly, that proved to be the case with the original Internet boom. Early investors in Amazon.com, eBay, and priceline.com made fortunes on paper -- until the bottom fell out of the market. Then, just as bulls had indiscriminately bid up shares of crazy-concept companies like Pets.com, bears quickly trashed valuations on even the most promising Internet companies. In the carnage that followed, you could have picked up shares of any of those companies at bargain-basement prices -- even as their viability and competitive position in their respective industries were actually improving. In other words, skipping the IPO could have saved you a fortune -- if you'd had the discipline both to wait and yet also to buy when the price was right.
Of course, there's no guarantee that the market will give you that chance. Certainly, early investors in Google bought their shares in the double digits and have never looked back. But missing out on the minimal chance of a big score is worth it if you avoid the much larger chance of paying way too much for an eventual flameout. Just as Warren Buffett faced criticism in the late 1990s that laggard Berkshire Hathaway (NYSE: BRK-B ) was stuck in the "old economy," Buffett eventually emerged the winner, as Berkshire shares rose steadily throughout the tech bust.
It's hard to skip out on an entire industry, especially when it's the topic of conversation not just among investors but from hundreds of millions of users. But from a long-term investing perspective, it just may be the smartest thing you could do -- at least as long as sky-high valuations remain the norm.
Keep your eyes on what's next for LinkedIn by adding it to your watchlist today.