Absent a Profit, New Issues are Rank Speculation

Is it important that a company reliably turn a profit? For most investors I suspect the answer is, most often, yes. Here at Iowa Wealth Management the answer is, always, yes. On Wall Street, though, where the need never falters to flog investors with new issues, the answer is too often no.

This past quarter saw a slew of initial public offerings and some of the most anticipated were of companies that had yet to make money. In fact, one proposed offering was for a company that managed to lose 1.3 billion dollars last year on 1.5 billion dollars in revenue. Please read that last sentence one more time, then pause and let it sink in.

A company squandered almost two dollars for every dollar of revenue generated and multiplied their futility one billion times. Despite (and possibly due to) these staggering losses, they want you to add your hard earned dollars to theirs. Where on God’s green earth is this a good idea? Well, on Wall Street.

Wall Street investment bankers literally exist to make these things happen. Their clients are the companies coming public and those companies pay their fees and bolster their expense accounts. As a result, it’s not the investment banker’s motivation that is difficult to comprehend; No one ever confused an investment banker as a friend of retail investors. What confuses me, personally, is how the retail brokers can flog these speculations to their clients and then go home and sleep at night. After-all, most retail clients focus on investing, not speculating. The retail brokers selling new issues are highly conflicted. After-all, aren’t their clients supposed to be, well, their clients?

If such companies are going to issue shares on public markets, can we at least drop the illusion that these shares are investments when clearly they are nothing more than vehicles for rank speculation? Too often last quarter, it appeared what was motivating everyone (current owners, bankers and brokers) was to get to public markets while the getting was good. Unfortunately in these cases, the good was for everyone except the investing public.

As fiduciaries for our clients, we don’t collect commission or promote speculation. Our Prudent Man process focuses on durable profits and dividends we hope you enjoy as long-term shareholders. This process makes our clients investors, not speculators. It also helps everyone sleep better at night.


 Past performance is no assurance of future results. Iowa Wealth Management is a registered investment adviser with its principal place of business in the State of Iowa. Opinions expressed are those of Iowa Wealth Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security.