Everyone wants to invest in the next hot thing.

Today, it’s SpaceX. Tomorrow, it might be OpenAI or Anthropic. Twenty-five years ago, it was Pets.com. More recently, investors have chased the excitement around Bitcoin, GameStop, AMC, and other “can’t-miss” opportunities.

The names change, but human nature doesn’t.

Articles, Links & Resources:
Parker-Financial.net – Work with our team to help with your retirement planning and invstment management.
Jay Ritter – Paper on Initial Public Offerings
NASDAQ – What Happens To IPO’s Over the Long Run?
IPO’s Long-Run Performance: Hot Market versus Earnings Management

Transcript:

475 – Investing in the Next Hot Thing

Announcer: Welcome back, America, to Sound Retirement Radio, where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for and transition through retirement And now, here is your host, Jason Parker

Jason Parker: America, welcome back to another round of Sound Retirement Radio.

So glad to have you tuning into this episode. You’re listening to episode number 475, Investing in the Next Hot Thing. And I have to confess, my hope was that I was gonna get this podcast episode out to you before the SpaceX IPO, but my daughter just graduated from high school last week, and it has been busy at the Parker family household.

So I apologize for not getting out the, this out sooner, but it’s still very relevant because we’ve got some other IPOs that are coming down the pipe. Everyone wants to invest in the next hot thing. Today it’s SpaceX, tomorrow it might be OpenAI or Anthropic. 25 years ago, it was Pets.com. More recently, investors have chased the excitement around Bitcoin and GameStop and AMC and other can’t-miss opportunities.

The names change, but human nature doesn’t. Before we get into today’s episode, let’s start out by renewing our minds. This is a verse from First Peter, chapter four, verse eight. “Above all, love each other deeply, because love covers over a multitude of sins.” And then something fun for the grandkids. What do astronauts use to keep their pants up?

An asteroid belt.

I think SpaceX is an incredible company. SpaceX has revolutionized access to space. Last year, SpaceX delivered roughly 85% of the world’s payload that was sent into low Earth orbit. That’s an astonishing market share, and it suggests they may currently enjoy a very wide moat. Starlink has transformed satellite internet, and it’s pretty remarkable to think that one company, and ultimately one person, can influence who has access to internet communications during a conflict like the Russia-Ukraine war.

Elon Musk has a track record of pursuing ambitious ideas that many people thought were impossible. And now, with SpaceX’s acquisition of xAI earlier this year, investors aren’t just buying a rocket company. They’re buying a company with ambitions in launch services, satellite communications, artificial intelligence, and perhaps someday even orbital data centers.

While xAI may not be leading the AI race today, I certainly would not count Elon Musk out. In many ways, SpaceX represents the ultimate next hot thing, and that’s exactly why I think we need to be careful. I absolutely want to own companies like this. The question isn’t whether we should own the next great company.

The question is when and how we should own it. Because some of our clients have been asking, “Should I buy SpaceX?” My answer is yes, but probably not the way you might think. The question isn’t whether you should own great companies. The real questions are: How should you own them? When should you buy them?

And how much of your financial future should depend on getting one story exactly right? As SpaceX becomes integrated into the major market index, it will naturally find its way into the broad market ETFs we use in client portfolios. That’s one of the benefits of a diversified approach. We don’t have to predict which companies will become tomorrow’s winners.

As they grow and earn their place in the market, we participate in their success. So yes, we absolutely want exposure to founder-led companies and the innovation they bring to the world. We wanna participate in human ingenuity, technological progress, and the wealth that successful businesses create over time.

The difference is, I don’t feel compelled to bet heavily on a single company before the market has had a chance to determine its value. Rather than trying to guess which one or two companies will become the next great winners, we own thousands of businesses around the globe and allow the winners to reveal themselves.

The real question I think people are asking is, should we take a concentrated bet on one company at one moment in time? So let’s talk about what that could feel like emotionally. Suppose you have a million dollar portfolio and you decide to invest five percent, fifty thousand dollars into SpaceX.

Limiting a concentrated position to five percent or less of your liquid net worth is a reasonable guideline if you’re gonna do it. So let’s take a look at a couple of scenarios for what could happen next. Let’s say the stock doubles. If that happens, you’ll probably be really happy, but you’ll also think, “I knew it.

I should’ve bought more.” You won’t just feel joy, you’ll feel regret. Now, suppose the opposite happens. Let’s say you invest fifty thousand and the stock falls fifty percent. Now you have twenty-five thousand dollars. Do you buy more? Do you sell? Do you hold and hope? Suddenly, the excitement turns into self-doubt.

You wonder why you let yourself get caught up in the frenzy. Now, suppose it goes up over time, but your diversified portfolio actually performs better. You took more risk, experienced more volatility, and you earned less. Or maybe SpaceX becomes one of the greatest success stories of our generation. It dramatically outperforms everything else.

You wish you would’ve invested more early on, and now you’re tempted to sell more of your diversified portfolio and put more money into a single stock. And the next time a hot opportunity comes along, you’re even more confident that you can identify the winner. In every scenario, regret shows up.

Investing isn’t just about math, it’s about behavior. It’s about fear and greed. It’s about all the stories we tell ourselves, and that’s exactly why I think it’s helpful to step back and ask, “What does the evidence say?” One of the leading researchers on IPO investing is, uh, Jay Ritter, often called Dr. IPO.

He spent more than 40 years studying companies that go public. His work has been published in top academic journals, and one of the things I most appreciate about the work that he does, he makes his data publicly available for anyone to inspect, and I’ll include some links in the show notes on the work that he’s done.

In a paper titled “Initial Public Offerings,” Ritter documented that companies going public between 1970 and 1993 produced average annual returns of 7.9% over the five years following their IPO. Compared with firms that did not issue stock, they produced annual returns of 13.1%. In other words, IPOs underperformed similar companies by about 5.2% per year over those next five years.

And more recent evidence points in the same direction. A 2021 NASDAQ study found that nearly two-thirds of IPOs underperformed the market three years after going public. Most lagged the market by more than 10%. That doesn’t mean that every IPO is a bad investment. A small number of IPOs become spectacular successes.

The problem is that we all believe we’re gonna be able to identify those winners in advance, and hindsight has a way of making investing look easier than it actually is. We all know someone who bought Amazon or Microsoft or Nvidia or Tesla, and they made a fortune. Was it skill or was it luck? The answer is that it’s often difficult to know.

Behavioral finance teaches us that we’re prone to mental accounting and selective memory. We love to talk about our wins, while our losses feel twice as painful. As a result, we tend to remember the stories that make us look smart and conveniently forget the ones we’d rather not revisit. It’s kind of like that uncle that we all have who goes to the casino all the time.

From the way he tells the stories, you’d think he wins every single trip. You hear about the jackpot he hit on the slot machine, but somehow you never hear about the dozens of times he walked out with lighter pockets. And yet, we all know those massive casinos weren’t built because everyone is winning all the time.

One of my favorite IPO examples comes from the dot-com era, Pets.com. In February of two thousand, Pets.com raised more than eighty million dollars in its IPO at eleven dollars per share. Amazon owned more than half of the company. Their sock puppet mascot was featured in Super Bowl commercials. How could it fail?

But just nine months later, Pets.com announced it was shutting down. The stock eventually traded for pennies. Pets.com wasn’t proof that selling pet food and supplies online was a bad idea. In many ways, the idea was ahead of its time. The timing wasn’t great, the economics didn’t work, and the company ran out of money before the market matured.

Today, we have companies like Chewy that appear to be winning in the very same industry. Consumers eventually embraced buying pet supplies online. The opportunity was real. It just wasn’t Pets.com opportunity to capture. But even that story comes with a cautionary tale because Chewy’s stock soared during the pandemic and reached an all-time high of more than a hundred and eighteen dollars per share in twenty twenty-one, and today it’s trading at a fraction of that price.

Does that mean Chewy is a bad company? Not necessarily. It simply reminds us that there is a difference between identifying a winning business and knowing what price to pay for it. A great company can still be disappointing investment if expectations become too optimistic. The lesson is that investing isn’t just about being right about the future.

You also have to be, uh, right about the timing, valuation, competition, execution. That’s a much harder game than most of us would like to admit. Being right about a trend or being able to identify the hype isn’t the same as being right about an investment, and that’s why investment philosophy matters. Why do you invest the way that you do?

I ask that question all the time, not just to prospective clients, but to other advisors. What’s your investment philosophy? What do you believe to be true? What evidence supports those beliefs? How does that shape the recommendations you make? I’m often surprised by how many people don’t really have an investment philosophy.

They’ve simply spent a lifetime buying things that sounded good, the things that were capturing the headlines. Our philosophy is built around a few key principles. First, we don’t accept uncompensated risk by concentrating your wealth in individual companies. The market doesn’t require you to take company-specific risk to pursue the returns needed to achieve your goals.

Second, diversification is your friend. It’s been called the only free lunch in investing. Third, a surprisingly small number of companies drive most of the market’s long-term returns. As Jack Bogle famously said, the founder of Vanguard, “You don’t need to find the needle in the haystack, just buy the haystack.”

Fourth, when emotions are running high, slow down. Ask yourself whether this decision truly needs to be made today. If it’s a great company today, it will probably still be a great company a month from now. Remember, we’re not interested in what happens in the next thirty days. We’re investing for the next thirty years.

And finally, build a strategy grounded in evidence rather than excitement. So will I own SpaceX? Absolutely. I wanna own businesses that are changing the world. I want exposure to innovation. I wanna participate in human progress. I just don’t want to gamble my retirement or my client’s retirement on my ability to predict which company will dominate decades into the future.

Investing should not feel exciting. Excitement is for rocket launches. Retirement planning is something completely different. A good investment strategy is usually boring. It’s low cost, it’s diversified, it’s disciplined, it’s periodically rebalanced, it’s tilted towards the drivers of higher expected returns, and it’s built for decades, not headlines.

The irony is that by resisting the temptation to chase every hot thing, you may actually give yourself the best opportunity to participate in the wealth that those innovations create. So yes, I wanna own SpaceX. The question isn’t whether I will eventually own it. The question is how I own it and when will I own it?

And I wanna own it in a way that lets me sleep at night by being part of a diversified portfolio. It’s not just the hype around SpaceX. I remember back in twenty twenty-four when Bitcoin was trading around seventy thousand dollars per coin. We were getting calls from people who wanted to buy Bitcoin. My advice was the same then as it is now.

We don’t need to take concentrated risk in a single investment to earn the returns needed for the financial plan to work. Well, over the next year, Bitcoin did really well. It climbed from seventy thousand dollars to more than a hundred and twenty thousand dollars. And for a while, our advice to stay diversified probably seemed foolish.

It would have been easy to look at that and conclude that we missed the opportunity. Today, as I write this, Bitcoin has fallen back down to around sixty-six thousand dollars, less than what they were paying for it back in twenty twenty-four. The point isn’t that I was right to recommend diversification.

The point is that if your investment philosophy changes every time the market rewards a different story, you eventually find yourself chasing whatever worked yesterday. So you have to decide what you believe before emotions and headlines test your convictions. If you truly believe that diversification, discipline, broad exposure to the capital markets offer the highest probability of success, you need to be very careful about abandoning that philosophy simply because another investment happens to be having its moment in the sun.

So what’s the takeaway? First, don’t take risks that you don’t have to take. You don’t need to concentrate your wealth in a handful of companies to pursue the returns that are required for your plan to work. Own the market, stay disciplined, and allow the winners to reveal themselves over time Second, decide what you believe before the next hot investment tests your convictions.

If your philosophy changes every time a new story captures the headlines, you’ll spend your life chasing headlines. SpaceX may very well change the world. OpenAI and Anthropic may reshape entire industries. Bitcoin may continue to surprise us. The future is bright. The challenge is participating in that future without betting your family’s financial security on your ability to predict exactly how it’s gonna unfold.

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Need assistance with investment management? Explore our services at parker-financial.net. Information and opinions expressed here are believed to be accurate and complete, for general information only, and should not be construed as specific tax, legal, or financial advice for any individual and does not constitute a solicitation for any securities or insurance products.

Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representatives, or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance-related discussions are subject to the claims-paying ability of the company.

Investing involves risk. Jason Parker is the president of Parker Financial, LLC, an independent fee-based wealth management firm located at nine two three zero Bay Shore Drive Northwest, Suite two zero one, Silverdale, Washington. For additional information, call three six zero three three seven two seven zero one or visit us online at soundretirementplanning.com.