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Holy Cow!
Did The Motley Fool sell out? Are we really cashing in by taking a low-grade company public? Did one of the biggest buy-and-hold advocates in the world of finance really give subscribers to The Motley Fool's Daytrader Alertfirst crack at the new issue?
Hardly!
Yesterday's announcement that The Fool was underwriting the IPO of eMeringue was, as many of you probably guessed, our annual April Fool's Day joke. We promise that The Motley Fool's Daytrader Alert is a product you'll never see from The Motley Fool.
What happened yesterday? If you'll remember, our make-believe eMeringue is a former auto-parts business turned Internet company that makes and delivers meringue toppings for pies. Not whole pies, not crusts, not fillings -- just the light fluffy stuff that sits on top. Thursday was a busy day for eMeringue. Here's what happened on its opening day:
-- eMeringue saw its offering price raised to $22.
-- The company first traded at $84 per share.
-- Management declared a 3-for-1 stock split.
-- eMeringue announced a hostile takeover.
-- The IPO day was marred by rumors of food poisoning.
-- The company got hit with a class action lawsuit.
-- eMeringue declared a 1-for-5 reverse stock split.
-- The SEC reported plans to investigate the company for fraud.
-- eMeringue was de-listed.
The day ended with CEO Larry McCloskey's arrest, after hijacking a Carnival cruise ship. And yet, of course, at no point during the day could any investor purchase shares of eMeringue. The company didn't and doesn't exist. Larry is a figment of our imagination.
Why did we pull this April Fool's Prank?
As with all of our work, we did it in an attempt to amuse and to educate. We also wanted to draw a few lessons that individual investors might find useful in the years ahead. They are:
1. Draw a Tight Circle of Expertise
Just because a broker, analyst, money manager, or your neighborhood butcher tells you a certain stock is a great buying opportunity, that doesn't mean it is. We think you should research and invest in the companies whose products and services you use and can understand. The mistakes we've made in our Motley Fool real-money portfolios generally centered on investing in that which we didn't understand and couldn't easily follow in the years ahead. We hope you'll help to educate investors and investors-to-be the world over by scorning "hot tips" and ignoring buy, sell, and hold recommendations from any source. The investor who researches into and understands the businesses she owns dramatically increases her chances of building wealth with common stocks over the long haul.
Lesson #1: Never buy a stock just because someone else does.
2. Beware the IPO
Some people think that the IPO market can provide quick and easy money. We'd suggest they think again. Today, investment firms and the financial media continue to quote opening prices for popular IPOs that do not reflect the prices available to public-market investors. When theGlobe.com came public, the underwriting firms -- Bear Stearns and Volpe Brown -- priced the shares at $9 a stub. But when the stock actually opened for public trading, investors with market orders were treated to a $90 share price. Individual investors need to be very careful of IPOs. The listed price is that of the latest private offering (LPO). Conversely, the initial public offering is the first public trade. These are often quite different prices.
For more info on the IPO process, check out Yi-Hsin Chang's (TMF Puck) recent feature The ABCs of IPOs.
Lesson #2: If you're going to buy shares on a company's first day in the public markets, know what you're paying before ordering.
3. Underwriting Firms Have Research Analysts
Another problem with the IPO process, one that The Motley Fool believes presents a largely unseen conflict of interest, is the fact that the investment bank that underwrites the offering usually assigns a research analyst to cover the business. This analyst then makes recommendations to investors. In eMeringue's case, as is so often true, that meant a "Strong Buy" recommendation from the underwriter. For this and other reasons, we always take analyst recommendations -- indeed, all recommendations -- with a grain of salt. A professional stock analyst's ideas can be interesting; many do excellent work. But their recommendation labels (Strong Buy, Buy, Accumulate, Hold) are silly.
Lesson #3: If you follow analyst coverage of a young company, note whether the researcher also works for the underwriter.
4. Not All Internet Stocks Are Hot
Lofty valuations of some Internet stocks have led many investors to think that any .com company is like money in the bank. Au contraire, mon frere. Yes, for years now, our real-money portfolios have invested in Internet leaders, from America Online to Amazon.com, from eBay to Yahoo! And we've done so because, like many of you, we perceived the Internet to be a low-cost platform for the distribution of ideas, products, and services around the world. We believe that, in 10 to 20 years, a network like today's Internet will enable a substantial portion of commercial activity around the globe. But that doesn't mean that every Internet horse on the infield will succeed. In fact, a great number will fail, miserably. The research on the Fool network combined with your analysis of individual stocks will help you sort the potential greats from the probable dogs. It is research you must do to succeed.
Lesson #4: Not all Dotcoms will win. Many will, in fact, lose.
5. Splits Don't Matter
If your interest in eMeringue increased dramatically yesterday when you heard the company had announced a stock split, we hope you'll reconsider the importance of stock splits. A stock that splits isn't worth any more than it was before it split. Let's say that Jerry owns one share of a stock that trades at $100 when, lo and behold, the company announces a 2-for-1 stock split. After the split, Jerry will have twice as many shares, each worth half as much, or two shares worth $50 a piece. David Gardner and Jeff Fischer each tackled the topic in recent Rule Breaker portfolio reports. Be sure to check them out.
Lesson #5: Don't pay attention to splits. Pay attention to good solid companies.
6. Selective Disclosure Stinks
eMeringue was made up, but the story illustrates how America's public markets are still mired in selective disclosure between public companies and Wall Street's investment firms. The two meet on private conference calls and in private meetings -- even though their exclusive conversations represent a violation of basic securities laws. If you work for a public company or are invested in a public company that doesn't include you in the disclosure of important information, let them know they're breaking the law.
We hope you enjoyed our April Fool's Joke for 1999. As you might expect, we consider April 1st to be our national holiday -- a day on which, through Foolish humor, community participation, and a touch of cleverness, we can learn more about the money we save and invest. Please share your thoughts on our April Fool's Day message folder.
Lesson #6: Selective disclosure is an insult to the tens of millions of Americans that are the owners of America's public companies. It is also a violation of securities laws.
Our April Fool's Conclusion
"The world is changed not by the self-regarding, but by men and women prepared to make Fools of themselves." -- P.D. James
Best to all,
David and Tom Gardner
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