Excitement Around the SpaceX IPO Is Peaking. Should You Invest?

Paul Winkler: Welcome to “The Investor Coaching Show.” Dan is playing drums over here. We got to watch him.

Dan Hill: And the head drummer did not like it.

PW: We’ve got to keep an eye on you, you and Evan. I mean, Evan’s playing keyboard when we start the show. You have to play.

DH: I forgot you were the drummer. I’ll do guitar.

PW: All right. All right. Don’t take my job.

DH: I don’t want your job, brother.

PW: You don’t want my job. Nobody wants my job. That’s right.

Dan Hill is with me today. This is exciting. We’re on the new set. We got a new set at the office.

DH: Very nice.

PW: You can’t see it if you’re listening. Well, you’d be listening on the radio right now if you’re listening, but you can’t see the set because this is not a video.

It is a video show after it’s done, though, so that’s why you want to subscribe to the podcast. That is a big reason to subscribe to the podcast and be able to get those emails on the video. There’s just a ton of stuff going on, man.

DH: Because you got that right.

U.S. Involvement in Iran War

PW: I read probably the best article on the Iran war today that I have read any place.

DH: Wow.

PW: Just getting what’s going on, who’s over there, the United Arab Emirates and Saudi Arabia, how they’re actually approaching things, how the U.S. actually is just absolutely necessary. We had to be there to do what we did for them to get involved, but how they’re getting involved.

We’ve known a little bit. We’ve heard a little bit about how they’re getting involved, because they were attacked themselves, but how they’re getting involved in the defense of themselves, and the UAE a lot more than Saudi Arabia, actually, but it was fascinating to hear the dynamics of what’s going on, and what’s happening makes so much sense.

DH: Well, where was that?

PW: It was in The Wall Street Journal.

DH: Okay, that’s a good one. Saudi Arabia wasn’t going to let us use their air bases anymore.

PW: Well, that’s what I was going to say. They are a little bit more reticent to get involved than the UAE is, but they are getting involved, and we may not be hearing necessarily how much they’re getting involved, but they are getting involved.

DH: Right, right.

PW: Yeah, so that was fascinating, just simply because that whole region, they tend to stay out. They tend to stay back, and you don’t necessarily hear how they’re getting involved in anything or they’re not getting involved.

And we start to think, Well, gosh. What are we doing? Are we lone wolves? Is this something that’s going to really turn badly? 

But it was interesting to see how The Wall Street Journal talked about the China and Russia influence on Iran, how that came about, and the weaponry, and some of the stuff we hear little bits and pieces of, but it’s probably the best article I’ve ever seen on it. I sent it to you guys. I sent it to you guys in an email.

DH: Okay. Well, let me just say this, Paul, because it’s kind of like you said, we just don’t know.

I watch a lot of the History Channel, and it’s World War II history. The show that was on this morning was about how U.S. industry, I think it was Exxon, GM, and Ford, were doing business at the initial beginning of the Nazi takeover. I’m 70.

PW: And you never heard that.

DH: I’ve never heard that, and I watch that stuff all the time and I’m going like, “Where’s this been?” So that’s what, 80 years old?

PW: Well, it’s so true.

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So much of the information that we probably need to or would like to know to make better decisions as Americans, we don’t know until years later or months later. 

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Anyway, so some of that stuff is coming out right now, which I think is fascinating.

DH: Yes, indeed.

SpaceX IPO

PW: That, and then the other thing that was in the news, you’ve probably seen the IPO, SpaceX IPO.

DH: I did.

PW: Making the news, the big deal, SpaceX IPO, all of these different publications writing about, “You want to get involved in this.” And one of the things that we talk about around here is, when we invest, you’re investing, we only advocate for investing in things that are already out there, already public.

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The problem is that IPOs tend to lose money in the first several months that they’re actually put out there. 

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And the reason that they get hyped up, they get hyped up to the point where the price when the company comes out, a lot of them, not all of them, but a lot of them get hyped up so much that they have nowhere to go but down after they become public companies. What we have found is historically, the last data I had seen, is that typically they want to wait about nine months.

So, the funds in the investment vehicles that I like to use, they’ll wait about nine months at least. It used to be six, and now it’s like nine is a typical, good number on what to wait.

The reason is that you’ve got somewhere in the neighborhood of 40 to 60% of IPOs that are below their offering price within a year, so you have a high percentage. And forget that the markets usually go up; we’re just talking about how they’re below their price.

What are they below markets? Well, studies go back decades, and I actually looked this up. I wanted to see what it had to say about it.

It says studies going back decades show that most IPOs underperform the broader market over three to five years, and there was a large historical study by Wharton Business School, where they found that four out of five IPOs underperformed small-cap indexes over time, and that would be the appropriate benchmark because they’re new companies, they’re small companies. You have four out of five, so your odds of this working out well, but people do, they get excited about this stuff, and they think they’re going to get rich quick.

DH: Yes. I thought that’s where you’re going to go. Why are people doing this?

PW: Isn’t that always the case, though?

DH: Yeah. Well, I mean, like you said, it’s because, “Well, the last time I missed the boat when, whatever, Nvidia, Facebook, Google, Amazon — ”

PW: Yeah. FOMO, fear of missing out. Sure.

DH: “— went berserk. I’m not going to miss the boat this time.” But it’s interesting what you said, because I was watching a clip on one of the business channels, and whoever the talking head was said, “A lot of times these things double right off jump street, but you don’t want that to happen.”

I was going, “Why is she saying that?” But now it makes sense, because what you said, you don’t want it to go up too high, because it can only then go down.

Owning a Company

PW: Yeah. Well, they double, but who benefits from the doubling, though? The person that owned the company.

DH: Right, right.

PW: They put it out there, and they have a price they set for it, right? The person that owns the company, and sometimes there are a select few people, insiders, people. I remember Barbara Streisand was a big one that would get this stuff, and you go, “Well, what does she get?”

DH: What about Martha?

PW: Martha, that was insider trading. That was a different deal.

DH: Well, she’s definitely insider.

PW: That was a different deal. But you’ll have maybe a brokerage firm that wants to throw a bone to one of their big clients, and they’ll let them in on something like this. What an IPO is, for those of you who don’t even know what we’re talking about, initial public offering, the idea is an initial public offering.

You’ll have a company that is a founder — in this case, Elon Musk. They develop an idea.

And often when I’m teaching in classes, I’ll say, “Hey, look. Who are the wealthiest people in the world?” I’ll often start the education session this way.

Kids in the classroom will say, “Well, it’s business owners. That’s who the wealthiest people are,” and they don’t get to it right away like that. They’ll typically name a name, and they’ll go, “Elon Musk, Bill Gates,” just people like that.

Then, I’ll say, “Okay. What do they all have in common?”

“They’re business owners,” and they get to the point where they get, “Oh, gosh. I get to be a business owner when I own a company.”

Well, you’ll have people like Musk and Gates, and these people that start companies that will take tremendous risk. Then, at some point, they want to cash out, so they will actually go to an investment banker and say, “Hey, we want to take this company public,” and the idea behind making it public is so that the general public, the American investors and international investors, so on and so forth, can invest in the company.

And they’ll set a price. They’ll come up with a price that they want to put this thing out there, just to start the ball rolling. Then, what will happen is people will start to bid up the price, and you can see it might double very, very quickly, and you go, “Gosh, who benefits from that?”

It’s not usually the investors, like the general public that are investing in this thing, that benefit from that. Particularly because of the hype, it just gets out of control, and then all of a sudden, the company’s price can be very, very high compared to the earnings that are expected. That’s what you’re buying when you buy a company.

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Think about it this way: You’re buying the rights to the earnings of that company going forward. 

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Now, you’re buying rights to the infrastructure and those types of things, but a lot of times, what happens is that that infrastructure is in place when a company goes public. The money coming in is going to be used to build the infrastructure, and so sometimes it can be super, super speculative.

Public vs. Private Valuations

PW: I remember one guy came to me. His accountant sent him over, and I’ll never forget this. It was a huge company, a very well-known company.

This guy, he said, “My accountant came over and said I need to go talk to you.” You could tell you really wanted to be there. He really wanted to be in my office.

DH: Gosh.

PW: It was pretty funny, man. “He told me to be here.”

DH: Like going to the dentist, man.

PW: Yeah, exactly. It was like going to the dentist.

So, I said, “Okay, what’s going on?” Well, he was an employee of this very large company, and he said, “We’ve gone public.”

I said, “I know. I’ve read about it in the papers. I know.”

He said, “He told me that I need to talk to you about diversifying this stuff.” I said, “It’s not a bad idea, so what do you got?” He told me how much money he had, and it was several million, as I recall, in the stock in this company.

I said, “Well, yeah. That’s probably a really good idea, because you may not end up going back to work. You’re dependent upon working at that company. Now you’re going to be dependent upon the stock price, and that can be really, really dangerous.”

So, he says, “Ah. But Paul.” I said, “Yeah?”

He said, “The stock has always gone up. It’s always gone up.”

I said, “Here’s why it’s always gone up: That price was determined. You’ll have somebody that comes in and does an audit of the company, takes a look at it, and they’ll do an estimate of its value, share price value, and they don’t really know. They’re using a lot of information to determine its value, don’t get me wrong, but they don’t have what we have when we’re dealing with public markets, where you have millions upon millions of people who are voting.”

DH: Billions.

PW:  Yeah, on the value of the company.

DH: Yes.

PW: On a daily basis, they’re trading this stock. It’s this idea that, when you have that many people with all disparate groups of people with different information, and they add their information together to determine the stock price, that price can change based on all kinds of factors that maybe a small group of people that did the valuation privately like that wouldn’t be privy to, like tastes.

Consumer taste, for example. I’ll just give you that as an example.

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You can surmise what the consumer taste will be for your product, but you don’t really, really know. 

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So, what ends up happening is, I said, “Oh. It just went up and up and up. You mark my words, once it goes public, you will not see that cascading upward movement in the stock price.”

Well, guess what he did? He didn’t listen to me.

DH: Surprise, surprise.

PW: And what happened to the stock price? It went half.

DH: Wow.

PW: Now, I don’t know what ever happened to this guy, because he never worked. He never came in again, but all I can surmise is that he probably kicked himself and was probably embarrassed.

DH: Exactly.

PW: Because, “Oh my gosh. That guy was right.”

DH: Yeah. Unfortunately, we have to be the bearer of bad news, and I think you’re right. I think a lot of times, in my experience, they don’t come back. They’re going like, “Wow. I should have listened.”

PW: Well, the embarrassment is too much. Yeah.

DH: Yeah.

Intelligence in the Investing World

PW: It’s sad. It reminds me of that story one of our friends, Mark, likes to tell, of this doctor who didn’t listen to him.

He just felt like he knew exactly what he was doing, and said, “Yeah, I’ve got this. I don’t need to do anything. I don’t need to diversify.”

I forgot what the heck the guy owned, but ended up that he had a situation where he came back in years later. Now, this was back in, I think it was like around 2000, 2001, 2002, somewhere in the neighborhood, this guy’s telling the story about it. The doctor comes back, and he’s a brain surgeon.

What happens quite often with people is that, if they’re really intelligent, they think that their intelligence parlays over into the investing world, and that they have abilities that the normal, average person just doesn’t have, and ego can really, really get in their way. So this guy actually goes out there and he decides he’s not going to work with our friend that does what we do in another state.

He leaves, and the guy just never hears back from him again until a few years later. The guy walks in, neurosurgeon, mind you, hand shaking like this. His hands are just shaking when he walks back in there, and apparently, he had lost, I forgot what percentage. It was probably like 80% of the value of the stock had gone away, right?

He walks in, and he says, “I can’t do neurosurgery anymore. I can’t do it anymore,” so he was literally toast. He said, “Would you work with my daughter?” It was, “Yeah, of course we’ll work with your daughter,” but it was just sad.

DH: Yeah. Oh, yeah.

PW: 

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This guy had actually thought that he really had this thing called investing down. 

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And especially, it was back when tech stocks were doing so well. It was a genius on feeling.

DH: Right.

PW: Everybody’s a genius, as they say, I was thinking about as I was saying that line, “Everybody’s a genius, especially in a bull market,” when things are going well, right?

Gambling With Investing

DH: Yeah, and unfortunately, we see that everywhere, Paul. One of my clients just lost her job Wednesday or Thursday, and she worked at the Caterpillar finance department here locally, and they’re laying off 30, 40 people, for whatever reason, and it’s like an outsourced job.

She was going, “Caterpillar’s up like crazy this year.” I don’t pay attention to individual.

PW: Individual stocks, right?

DH: We don’t do that, and it was up 155% or something like that, which is really, really good.

PW: And now it’s selling for what it ought to be, based on what the future is likely to be.

DH: Well, the future expectations.

PW: Expectations. Yeah, exactly. Those expectations better come through, or it’s going to come cascading down.

DH: Right. I mean, most of her money’s invested. That’s her little gambling account.

PW: Oh. Sure, sure, sure.

DH: I tell them they’ll have more fun if they go to Vegas and play Roulette or Craps or something than that.

PW: Some people like doing it.

DH: It’s the loyalty bias that we run into all the time that we teach about. The GM plant down here, the largest GM plant in the world, you know the years better than me, went down to $4 a share. What did all those guys own?

PW: Oh, it was amazing when that first opened. The hype around that when it first opened was amazing.

DH: Yeah. Costco’s another one, because my sister worked at Costco for 30 years, so I have a lot of Costco clients, and their stock has done very, very, very well, and it never goes down, like you said. It never goes down, and they are loaded up on Costco stock, because it’s been such a great ride, and it’s hard to do that.

PW: Well, that’s the hardest thing to do.

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When somebody is successful with their gamble, then they believe, “Wow. This is skill,” and they don’t recognize that maybe it was just luck.

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DH: Right, and then we run into the problem we just talked about, and now they’re embarrassed. “Oh, they’re going to say, ‘I told you so,’” and we’re not like that.

PW: No, no, no, no.

DH: We want to try to save them at whatever point in time we can save them.

PW: Shame doesn’t help. You don’t want to do that, and so often I just look at them and go, “Gosh. It’s just our human nature, and it’s just the way we’re made.”

Choosing Indexing

PW: All right, we’re back here on “The Investor Coaching Show.” I’m Paul Winkler, he’s Dan Hill. We’re talking money and investing. Danny, good to have you in here, man.

DH: Always good to be here, man. I’m glad I got to help you break in the new set that they can’t see.

PW: Yeah, that they can’t see. But if you subscribe to the podcast, you get to see that set and, of course, we send out emails daily on the new topics and things you go, “Oh, I wonder what they have to say about that.” And I think it’s YouTube, a lot of this stuff shows up. I don’t know, Stuart probably

DH: All good stuff.

PW: We have him explain how this all works. I have no clue. Some things I plan to be ignorant about as long as I possibly can. And it’s funny, I was the guy that had the first PalmPilot in Goodlettsville.

DH: Wow.

PW: And I had a laptop computer used to send applications in my deep, dark days when I was in the life insurance business.

DH: I forgot too.

PW: I used to send applications for life insurance in 1989 over the internet on a laptop computer.

DH: I forgot about the PalmPilots.

PW: Oh yeah, PalmPilot. That’s right. Then people would be like, “Paul, what is that?”

DH: What was the other thing like the PalmPilot? That I owned for a month or two?

PW: Oh gosh, my mind just went blank.

DH: It’ll come to me.

PW: I never owned one. Anyway, there was a segment on, I think it was CNBC, I think it was. It was something about AI and a lot of people, younger people, older people, I don’t know. I don’t know if it matters.

It’s all age groups. We’ll get pulled in on investing and thinking, Wow, this is really, really great and all these companies. But what companies have been driving a lot of the market gains in recent years?

We can name them. Apple.

DH: Technology.

PW: Yeah. We’ll have Nvidia making the chips, and that’s been making the news, of course, because of the new deals possibly.

DH: Microsoft, Google.

PW: Microsoft. Yeah, for sure.

So, typically what happens is these very, very big companies, they may have technologies and when we look at index funds, people hear the show and they think, Oh, you guys are not stock pickers, market timers. That’s not your method. What do you invest in? 

And they think indexes. And I often say, “Well, indexes are great in a couple different areas of the market.”

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Large U.S. stocks, indexing works well there. Large international, it works really well there. 

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If we look at other areas, small caps, look at value stocks, international value, international small value, emerging markets, so on, it doesn’t work as well. And the reason is that the bigger companies are overemphasized in these indexes, and because the bigger companies are overemphasized, it tends to hurt long-term returns, and it can increase risk too.

And the reason is that big companies don’t have as much room to grow. So, hence we often go, “Indexing is great.”

Allocating Your 401(k)

PW: When we’re dealing with 401(k)s, let me just say that. Somebody brings in their 401(k) and says, “Hey, can you help us allocate this?” We will usually try to find indexes in that case, most of the time, unless there are other better alternatives out there.

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The reason we’ll try to find those things is simply because we know that they’re not going to stock pick and market time.

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And you hear that all the time. And professional managers have a hard time beating the indexes, and that’s true. But if you want to make something look good just compared to something bad, an index compared to professional active managers, and you go, “Oh, they’re looking pretty bad.”

DH: Or, get rid of your bad fund.

PW: Yeah, that’s right. Oh yeah, right, survivorship bias.

DH: Yes.

PW: Yeah, exactly. So that’s a little technical idea where a fund company will ditch, they’re losing mutual funds to make their averages look better, is what Danny’s referring to there.

DH: So these are the things we talk about on a daily basis with new clients that come to visit us.

PW: Yeah.

DH: If they could really pick the stocks and this guy got it right yesterday, how many stocks would you own?

PW: One.

DH: One.

PW: That’s it.

DH: And yet certain companies have —

PW: Why would I own more than one? Why should I own five stocks?

DH: And I don’t name them. You can name them. I forgot what … has 23 actively managed large-cap funds, U.S., large-cap funds.

PW: Mm-hmm.

DH: Why?

PW: Yeah.

DH: Why do you have 23?

PW: And it’s well over a thousand if you count all of the funds that they have.

DH: Yeah, in large cap alone, growth.

PW: Right.

DH: Twenty-three.

PW: Oh yeah, it’s absurd.

DH: Last I counted.

PW: Yeah, it’s absurd. Right, for sure. And these are big mutual fund companies.

DH: Yes.

PW: Typically, we see these companies in 401k(s) on a regular basis.

DH: Yes.

AI Driving Returns of Indexes

PW: So anyway, the whole idea with AI is that it has been driving the returns of these big indexes because these companies that have been the developers of AI have actually been the benefactors of all of this new technology coming in. Well, this person made a really good point regarding AI that I want to share with you, and how it typically affects markets going forward and what you want to be aware of as an investor when it comes down to what could be ahead.

The idea being that we think, Oh gosh, markets are overvalued. And some areas of markets are very high-priced compared to earnings. So that is true. We’ll see that some areas are selling for very, very high prices.

But the issue is that all markets are “overvalued,” quote/unquote. And we don’t ever believe something’s overvalued. Let me just make a point about that.

DH: Very good.

PW: Yeah. We don’t make a point that we don’t believe this.

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It’s properly valued based on all knowable and predictable information. 

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But if we look at other areas and we say, “Gosh, has everything been on a big tear?” The answer would be no. So check this out.

Clip: If you have AI as a theme, themes play out over a number of years. We all know that. Nobody knows how long it might go on for, but if you have AI as a theme, you have to believe that eventually it starts to benefit other sectors.

So from a market strength perspective, particularly a place like healthcare, you want to see healthcare start to take part in an AI trade. We watched something like utilities take part in that trade. We watched copper and gold take part in that trade, but we haven’t seen other sectors benefit from a lasting fundamental perspective from the productivity that I still think AI can bring.

PW: And that’s the case. And that’s really what’s going on right there is you’ll have companies that aren’t benefiting necessarily.

They’re not implementing. They haven’t implemented the technology fully yet. So therefore, since they haven’t implemented, they haven’t seen the productivity growth that we are expecting out of them, and when they start to implement that, that can really bode well for those companies in the future.

The Future of AI

DH: Hopefully. So I guess Paul, the latest iteration of AI …

PW: Mm-hmm.

DH: Because if we just go back, AI’s been around, if you’ve been around, around 10 plus years longer than you.

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So AI was different then, but this latest iteration still is in infancy, pretty much. 

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And so hopefully they will put it to good use. Healthcare is the one that I’m like, hopefully they’ll put it to good use in healthcare and help. I sat on a plane next to a nurse.

PW: Well, then there are a lot of barriers that it doesn’t work that well too.

DH: Yeah. Well, she’s saying that they’re doing it and they think they’re getting close to a cure for Alzheimer’s. That’s what I want to hear that AI’s doing for me, not trying to figure out what I need to buy because I looked at something online.

PW: I had a client, and he was a longtime producer of this radio show, but he actually sent me an analysis where AI analyzed all of the stuff that we’ve had. And we’ve been doing this show for 25 years, right?

DH: Yeah.

PW: Analyzed 25 years or as much information as AI could get a hold of to determine what I would recommend people invest in.

DH: Wow.

PW: It blew it.

DH: Yes.

PW: That’s what I thought was so funny. It just blew it. So there are a lot of areas that it has a ways to go.

DH: Yes.

PW: But it is interesting that there are some things that it’s really, really good at. And as time goes on, these companies are going to be utilizing this to everybody’s advantage, and everybody’s going to benefit from it.

DH: So going back to where you started talking about the war, and you know this one.

PW: Yeah.

DH: When they asked AI for a solution, it opted for nuclear war on how to solve it.

PW: Oh no.

DH: Did you hear that one?

PW: No, I did not.

DH: The majority of times, it said, “Just nuke ’em.”

PW: Great idea.

DH: Don’t go to the peace table. Don’t try to talk things out. Just nuke them.

PW: No, that’s great.

DH: So it has a long way to go.

PW: It does have a ways to go.

Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.