Since the beginning of 2023, there have been over 1,000 IPOs in the United States alone.
In this week’s edition of Retire in Texas, Darryl Lyons discusses everything you need to know about IPOs, and why they are crucial to both the American economy, and the global economy.
Highlights of the episode include:
- An explanation of what an IPO is.
- The relationship between IPOs and small businesses across the nation.
- How IPOs serve as an indicator of which countries have strong financial foundations.
- Why IPOs may prove strategically important to a financial portfolio.
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Hey, this is Darryl Lyons, CEO and Co-Founder of PAX Financial Group. You’re listening to Retire in Texas. Thanks again for tuning in. This information is general in nature only. It’s not intended to provide specific tax, investment, legal or any of that advice. Visit PAXFinancialGroup.com for more information. Okay. So, this show we’re going to talk about IPO’s and it’s very important that you hear it because I’m going to present IPOs in such a way that it’ll be relevant to you.
But then we’ll also define IPO. So, hang with me. But this was triggered because Instacart as a company just went public. So, what’s Instacart? I don’t use Instacart. Instacart is if you want your groceries delivered. I know H-E-B has their own grocery delivery service, but not all grocers have a delivery service. So, a lot of people use Instacart.
And obviously during COVID, this was really popular and so a lot of people started just getting their groceries delivered, which makes sense because if you were to go to the grocery store, you know, if you’re anything like me, there’s leakage. You’re like, I kind of need this and kind of need that. And then if you have kids, there’s more leakage.
But with Instacart or any delivery items, you’re not tempted by what’s in the aisles. So Instacart is doing real well. And just recently they said, hey, we’re going to go public. And that was a big deal. So Instacart went public. So, what does that really mean? It’s called an initial public offering. So initial, it’s the first time. Public, they’re going to sell ownership through stock, through shares to everyone in the entire world at once.
It is not just a private group of rich people, an offering. So, they’re going to offer it to the public for the first time. It’s kind of like a Quinceanera, like when a girl is 15 and she’s now transitioning from being a child to a woman. It’s kind of that type of introduction into the world. So, it’s a really, really big deal.
Initial public offering. I have a friend who has a really cool business, and I was chatting with him earlier this week. It’s houses or lakehousesforsale.net. And so, he’s really good at selling lake houses on Lake Dunlap and McQueeney and Canyon and LBJ. He’s got this really cool technology and the right people. He’s really good at it.
So, suppose that he’s really wanting to expand something in his gut, says, I want to go bigger. And so, he starts looking and says, maybe I can expand what I’ve done with my technology and people and systems and I can adopt it in, let’s say, Lake Conroe, in Houston, or even in Rockwall or Grapevine, all those, every other lake in Texas.
But you need capital to maybe build out the people and the infrastructure and the technology and all that stuff. So, you go to what’s called the private markets initially, which is sometimes friends and family, but there’s people that are in the business of giving small business money and those are called a venture capitalist or you can call them private equity.
That’s kind of the first step. But let’s say he does really good in Texas. LakeHousesforsale.net is like blowing up in Texas and so he wants to go everywhere in the United States. Now he might say, okay, I want to go beyond just the private and rich people. I want to offer my stock to the public so I can get more money and then use that money to buy the technology and the people and the systems to expand way beyond Texas.
And so that’s kind of the thought behind an IPO initial public offering, and that’s how it kind of works. It’s very much in a biblical context. Jesus says, go make disciples of all nations. Jerusalem, Judea, Samarra and beyond. And so, if you think about it, the initial startup of an entrepreneur is kind of that first initial grind. Maybe family or friends are chipping in, but most of the time it’s your own money.
For us, at PAX. I mean, it was just a grind. And then as you start to get, you know, some growth and you’re thinking, man, I could probably take this bigger, that’s when you go to this what’s called a private market. And the private markets are typically like I said before, rich structured companies are often referred to as private equity or venture capitalists.
But you have to have some substance of a business. You can’t just I suppose you could have just an idea. But most private equity and venture capitalists, the smart rich money that have sophistication, they’re going to want to see some more substance behind just an idea. So going back to my friend with lakehousesforsale.net, he would have to have if he wanted to take his lake Dunlop and McQueeney thing and expand it further beyond Texas.
He would go to that private market and explain the rationale. And so that private market is very, very sophisticated and it’s very healthy. But again, there’s a certain point where you say, I want to go bigger and you want more money to be able to go really, really big and that’s the public market. So that’s the initial public offering IPO.
And there’s three reasons why you need to know about IPO. No rhyme intended. You need to know about IPO first. It really sets the bar. It sets the financial bar really in America, I think it’s taken for granted because when people at the very highest level are paying for business, the collective vote of all the investors sets the price of that business and then every other business in the world references those sale prices for their business.
So let’s go back to this lakehousesforsale.net. Let’s say they go public, and they sell for a ton of money and the initial public offering, and somebody locally has a technology real estate business. They’re going to reference the price that was sold in the IPO to determine how much their business is worth. And it’s not going to be the same, but it’s a reference point.
This reference point is so important because every small business in America, they don’t know this. This is not just intuitive, but they’re their benchmark. They’re anchoring to the IPO marketplace is what the businesses are selling for. And so small businesses where the majority of today’s net worth is captured in small business, these studies are just unbelievable here.
Businesses, you know, they take risks, they sweat equity, they put their lives into it, and eventually they’re going to want to be able to take their chips off the table. And so, they’re going to want to know that there’s some type of value to their business and they could make it up and they could ask around.
But really what people don’t know is oftentimes the values that are expressed for every business owner in some way can be traced to the IPO market and how healthy that IPO market is. And I don’t want to get into the numbers so much today because that will get confusing. But just so you know, the value of all businesses in America, generally speaking, are connected to the numbers and the values that are derived from the IPO market.
So that’s number one. That’s very important. Number two, it tells the world who’s winning the war, not the, you know, not the battles, but the war for talent, the in which does exist. But it’s really a litmus test of what country has the most innovative entrepreneurs. And so, this is really, really important because it tells the entire world what country has created a framework that encourages creativity, innovation, risk taking, visionaries who get paid for their work.
It’s sending a message to the entire world without just rhetoric. It sends a huge signal when companies in the United States go public. It’s telling the entire world that America, if America is leading the IPO market, it’s telling the entire world that we’ve got the intangible substance of being able to take a vision and see it to completion because we have the financial framework to make it work.
Don’t take this for granted. IPOs, by the way, started in the 1600s. This has been an old stress tested, tweaked model. I think we often take for granted the sophistication of our financial markets and how far ahead we are of other countries. And the IPO market is a testament to that. And this year, 2023, we’ve already had over a thousand already over a thousand IPOs.
That represents a healthy market Now, not all of those in the United States, but it does suggest that the markets are healthy generally speaking, and that people are being rewarded for their risk. And the third reason why you need to know about IPOs is because as an investor, you want to know that there’s opportunity for growth. I mean, certainly the older companies like GM and Ford and Procter and Gamble and, you know, the dinosaurs of G.E., those are good companies.
But you want some juice in your portfolio. You want the Instacart’s, the Airbnbs, the DoorDash’s the Uber’s, Lyft. These companies didn’t exist ten years ago, and you want to be a part of their future in some way. And so, it’s really healthy for you to have some of these innovative companies in your portfolio. And, you know, if you go back to December 12th, 1980, I was more thinking about Christmas and I, I told my dad and my mom, I don’t want the Castle Grayskull He-Man toy and I do not want Optimus Prime.
I told him that and they did not listen to me. I told them I was four years old. I remember very clearly it was two days after my birthday. I want Apple stock. That’s all I want. Mom and Dad. I just want some stock in Apple. They just didn’t listen to me. So had they invested 10,000 on December 12th, 1980, what would that 10,000 be worth.
This was when Apple did their IPO. That 10,000 would be worth over 14 million. Today. Unbelievable. Now, not every IPO does that. Well, don’t get me wrong. There’s plenty of failures out there, but that’s a good example of what can happen when you invest early in a company. Now, that leads me to the next point I want to make quickly.
How do you get these IPOs? First of all, Warren Buffett says, well, he doesn’t like to buy IPOs because there’s too much volatility in the first place. I mean, they go up 50%, down 50%. It’s kind of crazy. So, you really don’t mess with the IPOs. You just kind of wait for the information to settle because there’s a lot of emotions.
People are still trying to figure it out. I mean, we don’t even know, like, some people just get rich. Some of the key leaders, they just get rich off of the initial public offering and then they bail. So, you need to see who stays. You need to look at the numbers. You got to look at contracts. So, when the initial public offering comes out, Warren Buffett and I would agree with this, you just kind of let things settle before you buy it and you can buy the individual stocks.
But I’m going to lean into what we’ve always said. Let your mutual funds and your exchange traded funds buy them. If they’re a good company, they’ll get into your portfolios, they’ll get there, and they might get in with a small increment at first. But over time you’ll see them get there. So, I wouldn’t worry about chasing down IPOs necessarily.
Just know that a part of a diversified portfolio will typically get you exposure to some of those more spicy companies that are just starting out. So just in summary, as I kind of bring us home here, I want to make sure that you understand what an IPO is an initial public offering and how important it is to our country.
Number one, it sets the financial bar for every small business in the entire country. It tells the entire world what a small business is worth. And that’s important because the majority of America’s net worth, I don’t want to say the majority, but a big chunk is for our case, our big marketplace, too. But a big chunk of people’s net worth is in their small business.
And so the IPO market tells everyone this is what a business is worth. So that’s very important. Two, it’s sentiment. It tells the entire world how healthy the capital markets are, how well people are being rewarded. The headlines of somebody making it big because of an IPO sends a signal to everyone else that taking risk is worth it.
And so that’s very important. And so right now we’ve got a pretty good IPO market. And you can actually, if you want to go online, you can find the history of IPOs and how many have happened each year and some years are better than the others. And then finally, the first one is understanding the value of a business, two, the health of the markets.
And three, IPOs eventually trickle into your portfolio, and they are the necessary spice because you want to be early on some of those companies who have innovative ideas and that are growth minded. Although the dinosaurs are still good, you want to have some of that spice too. So hope that helps initial public offerings, which is something that’s kind of like, well, why would you even matter to me?
Hope that gives you some context. They are an important part of our overall financial framework. They’re an important part of your investment portfolio. And just keep in mind, as always, when you own this stuff, you think different when you think long term. Have a great day.