So you didn't make an 80% return by purchasing shares of Twitter (NYSE:TWTR) on the day of its initial public offering. But neither did anyone else, with the exception of insiders, including venture capitalists, investment bankers, and company co-founders.
However, a wise investor can always observe such market events, learn from them, and make use of those lessons in the future.
Here are three investing lessons from the Twitter IPO.
1. IPOs are not really for the public
I recall visiting a swimming pool as a child where I noticed a sign that read: "This Is Our 'ool'. Notice There Is No 'P' in It. Let's Keep It That Way!" Although I was only 12 years old at the time, I understood the joke and thought it was incredibly funny.
I thought of that "ool" again after the Twitter IPO, because it seems there was no "P" in that either; it was more of an "IO." But in this case, it wasn't funny. The public was unable to buy shares until insiders had already bid the stock up and reaped massive gains.
For more Foolish wisdom on the Twitter IPO, let's move on to point No. 2 (no pun intended).
2. The news is as much entertainment as information
Most media headlines at the end of the Twitter IPO day read something like this: "Twitter Shares Jump 80%." While this is not a complete fabrication, this headline is certainly misleading on a few levels. First, the IPO price for Twitter was set at $26 per share. However, the opening price was $45.10, which is a 73% jump. But doesn't 80% sound so much better than 73%?
On a second level of deception, the "opening price" is the price at which the public can begin buying, by which time the insiders have already made their profits. Again, this underscores the point that while IPOs may be public, they are created for private gain.
Remember this: The media is in the business of attracting consumers for the purpose of selling advertising. In other words, most of it is entertainment. So don't take everything you read too seriously.
So who made 80% on Twitter shares' IPO day? No one. But who made 73%? Venture capitalists, the co-founders, and other Twitter insiders.
What alternatives to IPOs do individual investors have for boosting portfolio performance? Thanks for asking.
3. Sector funds and ETFs can be a smart alternative to IPOs
While the media and investor herd become fixated on IPO valuations and performance, wise investors are looking to sector index funds or ETFs. In some cases, the sector fund can rise in value even as the IPO share price falls.
Short-term performance is no indication of long-term potential. However, to demonstrate the point that IPOs are not a get-rich-quick investment (not for the public, at least) and that there are better ways to enhance portfolio performance, compare the early days of Twitter's stock history with the Global X Social Media Index ETF (NASDAQ:SOCL), which holds a basket of social-media websites and other Internet ventures including Google and Pandora. Twitter shares have declined almost 10% from their opening price of $45.10 to today, whereas the Global X Social Media Index ETF has risen almost 2% over the same period. That's a nearly 12% short-term sector outperformance over Twitter.
For a longer-term perspective and a broader tech-sector play, look back 18 months to the IPO of Facebook (NASDAQ:FB) and compare the stock's performance with that of the Vanguard Information Technology ETF (NYSEMKT:VGT). From Facebook's IPO day on May 18, 2012, through Nov. 20, 2013, Facebook is up 21%, while VGT has gained about 29% during the same period. Again, there is significant outperformance of a sector ETF over the IPO.
The underlying lesson here is that you would be wise to avoid jumping into IPO frenzies and instead focus on the bigger picture and consider using sector index funds or ETFs to boost portfolio returns. Furthermore, sector investing can play an important role in long-term performance and in diversifying your holdings, regardless of the role IPOs play in the relative sector's performance in the short term. You can thereby increase the your potential for solid returns while minimizing market risk -- the goal of every Fool.
Disclaimer: The information here is provided for discussion purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.
Fool contributor Kent Thune has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.