SpaceX IPO: What IPOs Really Are—and Why Your Plan Doesn't Need Them (EP.244)

0:28We all need to make smart decisions with our money. public, it won't feel like a normal IPO. It'll feel more like an event, one of those rare moments that spills out of finance and into everyday conversation. And I think people won't just be asking whether it's a good business. They'll ask if you got in the way that they asked about Facebook back in May of 2012 or even Google before that, when those tickers became cultural shorthand for opportunity. For starters, its founder, Elon Musk, is a household name and And anything he touches ends up being headline news. But SpaceX is also the company that made science fiction feel real by making private spaceflight be a real possibility these days.

1:08But there's also excitement around Starlink, which if you have not heard of that, it is a global broadband network that turns space really into material infrastructure. And I think these two businesses paint this picture of, like I said, this science fiction like technologies turning into reality. Now, as of this recording, there's no confirmed SpaceX IPO date, but this episode actually is not about forecasting SpaceX. I thought this would be a good opportunity for understanding how IPOs work and how you should think about them in your portfolio. So in this episode, you're going to learn who's involved in an IPO and when the public market actually gets access, why the IPO price isn't the price most people can buy, and how prices tend to behave on day one as well as in the months after the opening hype fades.

1:55We'll close the episode with a framework for how to think about investing in IPOs. And if you're interested in learning more about how PlanCorp can help you invest, there's a link at the top of the episode description. You must have$2 million of investable assets to work with us, but that link will take you directly to my calendar to book a call with me. Now, let's start with IPO 101. Just how does an IPO work? Well, the IPO is the process of turning a private company into a public one. It's not a moment where the stock simply appears on your brokerage app. Before that, shares have to be priced, sold, and distributed.

2:30And there's a few different players involved. The first is the company, obviously, and going public is a way to raise money for growth. It also gives early owners a path to cash out some of their stake and create a market where shares have a daily price instead of an occasional private one. Now, the next group are the underwriters, usually large investment banks. You can kind of think of them as the party planners or the organizers. They help the company market the deal. They collect interest from potential buyers, set the initial terms, and decide how the first block of shares gets distributed.

3:03Then come the big institutions, mutual funds, pensions, hedge funds, and other large pools of capital. These are the buyers who can commit meaningful dollars before the public market ever opens, and their demand plays a major role in how the initial pricing takes shape. And then finally, there's the public. That's when the ticker goes live and the stock starts trading in the open and where price stops being a negotiation but starts being the open market contest. And for most individual investors, this is the first realistic point of entry. So if you want to keep just one idea in mind to think about all these players, an IPO is really a staged launch.

3:44The first shares are sold and distributed before you can even place an order, and only then does the open market take over. Here's where IPO headlines trick people. They talk about the IPO price as if it's the price everyone can buy, and it really isn't. So if it wasn't clear from me talking about those different players involved with the IPO, there are two different prices and they happen in two very different moments. The first is the offer price, and that's the price set before public trading begins. It is what's used for the initial sale of shares during the IPO process. And it's the price you'll hear quoted when someone says it's priced at X dollars.

4:22Now, the second price is the market price. That is the price that appears once the stock starts trading on an exchange. And that's the price that's formed in real time by buyers and sellers in the open market. And it's the price most of us can actually access. Now, once you see the difference, the one-day headlines start to make sense. because you'll hear the IPO popped 30%. And the comparison is usually the offer price to early market price, not a return that every investor could have captured. So if it opens above the offer price, it's called a pop. And if it opens below, it's usually framed as a flop.

4:58So why do IPOs pop at all? I mean, think about it. If a company is valuable, why not just set the price perfectly and capture every dollar for those early stage investors? Well, because an IPO price isn't discovered in this clean, open auction that you would get in an everyday stock market set of transactions, it's set during this short window with limited public history and plenty of disagreement about what the business is worth. So the underwriters, again, typically those large investment banks, they're trying to land the plane by setting a price high enough to raise meaningful capital, but not so high that the stock stumbles out the gate when it hits the open market, making the deal look like a failure.

5:41So that's where the pop comes in. During the roadshow, as they call it, the underwriters, they collect orders and feedback from large investors, and they use that demand to set an offer price that gets the deal done and gives it momentum. Now, in practice, that often means leaving a little room, pricing it at a level where demand is likely to be stronger than the available shares. If the market's appetite turns out to be even higher than the offer price reflects, the first public trades reprice that stock upwards. So the next question then is who actually gets the offer price? Well, in a really hot IPO, demand is exceeding supply, and there aren't enough shares to fill every request, so the underwriters ration them.

6:21And the rationing is not random. The allocations tend to lean towards large, repeat participants. So investors who are showing up for deal after deal can buy in size and help create a stable launch. And that's not really any sort of moral judgment. It's just how a relationship-driven distribution system works. So some brokerages will offer retail IPO access, but in the deals people are most excited about, the ones where a pop is most likely, allocations are often very tight. Even eligible investors may only get a small fill or none at all. So the headline return that you see with that pop is tied to a price that many investors never had a realistic shot at.

7:00And once trading begins, most people enter at the market price where the trade is different. Now, after the IPO, the ticker's live, and you wonder what is going to happen next. And it's often actually less about fundamentals than people would realize, and more about price discovery. So when the story is loud and expectations are high, the market is trying to agree quickly on what the company is worth. And that process can be choppy, especially in the first few days and weeks because so many investors are reacting at once to the same fresh narrative. Then there are a few predictable calendar events that matter the most.

7:38And I actually created a table in the show notes at thelongterminvestor.com that you can see in more detail than I'm going to describe here on the show. But at the longterminvestor.com, I have a typical calendar of events of how IPOs unlock and unwind over time. The biggest thing that I think is worth pointing out is the lockup. Because in many IPOs, insiders and early investors can't sell right away. And when that restriction ends, more shares can come to market. So even if nothing has changed about the business, the balance of buyers and sellers can change a few months in. And as a result, so can the stock's behavior.

8:14So that's why IPOs deserve a different mindset than long-term investing. If you're tempted to buy early, it helps to know when those supply and demand dynamics can shift. So again, I'll include an IPO timeline table in the show notes. It has stuff like the S1 filing, the first date of trading, the first earnings, the lockup expiration, the index inclusion, so you can reference it quickly. Now, should you buy an IPO? Does it have a real purpose inside a portfolio? I think it's always important to remember that the reason we invest is to grow our savings faster than the rate of inflation without taking undue risk.

8:51I say that all the time. I mean, that's the job. It's not to tell a good story at a dinner party. It's not to be early on a stock. Headline IPOs, especially ones with as much gravity as SpaceX, tend to pull you in the opposite direction. They turn investing into an event. It creates a scoreboard and it makes it feel like there's this narrow window where you either act or you miss out. And that's why for most people, IPOs function more like a trade than an investment. And I'm going to be direct. I don't believe in individual stocks in your long-term portfolio. I've laid this case out again and again.

9:27I think the last time I did it was episode 166, which is titled, Why You Don't Have to Pick Winning Stocks. I'll link to it in the show notes. But if you feel the pull of easy money or what you think is easy money, just run a simple thought experiment before you do anything. So first, think about how much would you have to put on this trade for it to meaningfully change your life? Not just make you feel smart, not just give you a dopamine hit, but actually change your life. Now second, take that amount and think about what if it doesn't go the way you expect? What changes? Do you lose sleep? delay a goal like retirement or vacation or funding a grandchild's education?

10:05Does it make you feel pressured to earn it back? For most investors, the honest answer is uncomfortable because to be truly life-changing, a single stock has to be an outsized bet relative to your portfolio and your net worth. And the odds of any individual stock trailing the broader market over the long run are higher than most people want to admit. Again, go listen to episode 166, why you don't have to pick winning stocks. And really, that's why your plan shouldn't require it. Your plan should work on the days you're bored. It should work on the days when the world is obsessed with one ticker.

10:39And SpaceX might be a great company. If it IPOs, it will be a story people want to be a part of because it feels historic, because it's the type of ticker that can turn into conversation overnight. But if you don't get access to the offer price, remember that's normal. That's how the process works. Now, if you want help with these ideas or applying a framework to your own investments, whether it's position sizing, diversification, tax decisions, and just more help in guiding you through decisions that are really between investing versus trading, you can learn more about PlanCorp using the link at the top of the episode description.

11:17We're typically a fit for households with at least$2 million or more to invest. And if you are a fit, that link will take you directly to my calendar. We'll have a quick conversation. I'll make an introduction to one of our amazing wealth managers. And I think that we can help you get your whole financial house in order and keep it that way forever. As always, thanks for listening. And until next time to long term investing. Thanks for listening to the Long-Term Investor Podcast. To access free financial resources and submit questions to be answered on the show, visit thelongterminvestor.com. Peter Lazaroff is an employee of PlanCorp and BrightPlan.

11:57All opinions expressed by Peter and any podcast guests are solely their own opinions and do not reflect the opinions of PlanCorp or BrightPlan. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of PlanCorp and BrightPlan may maintain positions in the securities discussed in this podcast.