IPO Fever: Before You Chase the Next Big Thing, Ask These Five Questions

Every few years, the market seems to develop a new obsession.

In the late 1990s it was internet companies. In 2021 it was SPACs and meme stocks. Today, the spotlight has shifted to a new wave of artificial intelligence companies, private technology giants, and headline-grabbing initial public offerings (IPOs).

It's hard to open a financial news app without seeing another story about companies preparing to go public or reaching eye-popping valuations. Investors naturally wonder whether this is a once-in-a-generation opportunity—or whether history is repeating itself.

The reality is that both things can be true. Some IPOs will eventually become extraordinary companies. Others may never live up to the expectations embedded in their initial price.

The challenge isn't identifying exciting businesses—it's determining whether the price you're paying already assumes years of future success.

As legendary investor Jeremy Grantham has often noted, markets can become detached from fundamentals when enthusiasm overtakes valuation. During periods of speculative excitement, investors frequently convince themselves that "this time is different." Sometimes innovation truly is transformative. But even transformational companies can become poor investments if purchased at unrealistic prices.

Recent events illustrate the point. SpaceX's IPO was met with enormous enthusiasm and quickly became one of the most talked-about stocks in the market. Yet within weeks, the excitement had cooled and the shares traded below their offering price. Nothing fundamental about the company's long-term potential necessarily changed. What changed was investor expectations.

That's an important reminder that even exceptional businesses can experience significant volatility when optimism gets ahead of valuation.

Why IPOs Feel So Tempting

There's something uniquely exciting about owning a company at the beginning of its public journey. Investors imagine buying the next Amazon, Apple, or Nvidia before everyone else catches on.

Behavioral finance tells us that several powerful psychological forces are at work:

• Fear of Missing Out (FOMO): Watching others profit makes sitting on the sidelines uncomfortable.
• Recency Bias: Recent success stories make future success seem more likely than it really is.
• Narrative Bias: Compelling stories about revolutionary technology can overshadow traditional valuation metrics.
• Social Proof: When everyone seems excited, it's easy to assume they know something you don't.

None of these emotions are irrational. They're simply part of being human. The goal isn't to eliminate emotion—it's to avoid letting it make investment decisions for us.

Remember: Great Companies Aren't Always Great Investments

This is one of the most important distinctions investors can make. You can absolutely believe that artificial intelligence will transform the economy. You can believe autonomous vehicles, space technology, robotics, or biotechnology will change the world. None of those beliefs automatically tell you whether today's stock price represents a good investment.

As Charles Schwab has pointed out, IPO investing often comes with unique risks, including limited trading history, significant volatility, uncertain valuations, and elevated investor enthusiasm that can drive prices well beyond what fundamentals justify.

The question isn't whether the company is impressive. The question is whether the current price already reflects that optimism.

History Offers Some Perspective

Market history shows that periods of intense excitement often produce both enormous winners and painful disappointments. The dot-com era gave us Amazon—but it also produced hundreds of companies that disappeared entirely. Many internet companies were solving real problems. The mistake wasn't believing in the internet.

The mistake was assuming every company would justify any valuation.

Today's environment feels different in many ways. Artificial intelligence appears likely to have lasting economic impacts. But one lesson has remained remarkably consistent throughout market history:

Innovation and investment returns are not always the same thing.

Five Questions to Ask Before Investing in an IPO

When excitement is high, slowing down may be the most valuable investment decision you make.

1. What would have to happen for me to change my mind? If your answer is "nothing," it may be worth pausing. Strong investment ideas evolve as new information becomes available. Emotional decisions often don't. Having predefined reasons to reevaluate your investment can help reduce the tendency to rationalize disappointing outcomes.
2. Would I still want this investment if nobody else were talking about it? Headlines create urgency. Friends create urgency. Social media creates urgency. Take all of that away. Would this still fit your financial plan? If the answer is yes, that's encouraging. If not, the excitement may be influencing your decision more than the investment itself.
3. How would I feel if this investment dropped 50%? IPO volatility is common. Many newly public companies experience significant price swings during their first several months—or even years—of trading. Instead of thinking in percentages, think in dollars. How would you feel if a $100,000 investment became $50,000? Would you buy more? Sell? Lose sleep? Your answer tells you far more about your risk tolerance than any questionnaire ever could.
4. What purpose does this investment serve? Every investment should have a job. Does it generate income? Increase diversification? Provide long-term growth? Or is it simply an opportunity you hope will appreciate quickly? There's nothing inherently wrong with speculative investments. Problems arise when speculation begins replacing a thoughtfully diversified investment strategy.
5. What am I giving up to make room for this? Every investment decision involves an opportunity cost. If you're purchasing a new IPO, where is that money coming from? Will you sell diversified investments? Reduce your emergency savings? Delay other financial goals? Sometimes making room makes perfect sense. Other times, it quietly moves you away from the financial plan you've already built.

Excitement Shouldn't Replace Discipline

None of this means you should never invest in IPOs. For some investors, allocating a small percentage of their portfolio to higher-risk opportunities may be entirely appropriate. The key is making those decisions intentionally—not emotionally.

A disciplined investment strategy doesn't ignore innovation. It simply evaluates new opportunities within the context of your overall financial goals, time horizon, risk tolerance, tax situation, and income needs. That's especially important during periods when headlines make every opportunity feel urgent.

How Birch Street Financial Advisors Can Help

At Birch Street Financial Advisors, we understand how exciting new investment opportunities can be. We also believe that every investment decision should support your broader financial plan—not distract from it.

Before investing in an IPO, concentrated stock position, or other high-profile opportunity, we help clients evaluate questions such as:

• Does this investment fit your long-term goals?
• How much risk are you already taking elsewhere in your portfolio?
• Are there tax implications to buying or selling other investments?
• Would a diversified approach better accomplish what you're trying to achieve?
• If you decide to invest, what percentage of your portfolio makes sense?

Sometimes the right answer is to invest. Sometimes it's to wait. Sometimes it's realizing you already have exposure through diversified funds and don't need to chase the headlines.

Our role isn't to predict the next market winner—it's to help you make thoughtful decisions that align your money with the life you want to live.