DEDUCED RECKONING: Don’t ignore the stock market's lessons of 2021

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Joan Lappin

Periodically, external forces compel investors to throw all caution to the wind in a rush to get rich quick. During the tech bubble in the late 1990s, people would pay anything for companies with no earnings but lots of future prospects. Repeating that pattern, last year was a battle between those who had seen that movie before and those who joined the Reddit/Robinhood brigade and threw money at companies that were about to go bankrupt or already had.

When I began my career forever ago, the NYSE was still a powerhouse entity owned by its stakeholder floor brokers. Specialists put up their own risk capital to make “orderly” markets in the securities whose books they were responsible for. They attempted to match buy and sell orders and wouldn’t open a stock for trading until the book matched. The NYSE ran ads on TV urging investors to “own their own share of American business.” That quaint concept was to understand what you owned and not pay more for it than its financials warranted or that you would pay in a private transaction.

Now over 80% of all trades are computer generated. Index funds and exchange traded funds are managed by computers, not humans. The computers rapidly match any moves in all of the stocks in that index you have chosen. The lack of human intervention is what causes stocks to now go up and down 10% or more in a day because of an event like disappointing earnings or a brokerage recommendation. There are no longer human market makers smoothing out trading.

Last year, many investors were again willing to pay 100x losses for companies that “have promise” but no earnings now or in the next two or three years. Suddenly we watched the Robinhood/Reddit crowd barrel into companies with large short positions and run them up dramatically even if the company was on the verge of bankruptcy. Think of GameStop, AMC, and Hertz in that context. Hertz actually managed to sell shares to the public as it was heading into bankruptcy court until the SEC stepped in and stopped it.

In 2021, more than 1,000 new companies raised $316 billion in Initial Public Offerings. That was twice the 457 companies that went public in 2020 raising $168.7 billion. The most offerings last year by sector were in biotech (155 IPOs valued at $29 billion) and technology with 128 IPOs raising $74 billion. Last year surpassed the previous IPO record set in 1996, when 848 companies went public.

Renaissance Capital manages an exchange-traded fund that trades with the ticker IPO. Renaissance reports on average that new issues rose 31% on their first day of trading. Their IPO fund ended 2021 -8.5% reflecting the reality that, by year end, all the IPOs in total had lost 10%. It is estimated that two-thirds of the 2021 crop of IPOs are now selling below their offering prices.

Of the 1,000 companies coming public in 2021, 60%, or 456, were SPAC (Special Purpose Acquisition Companies or “blank check companies”), which raised a combined total of $116.6 billion. This category is designed to use the money raised to acquire unspecified entities. You are truly buying a “Pig in a Poke.” If they make no acquisitions, they must return the funds to investors. Donald Trump was involved in one that trades now as DWAC, Digital World Acquisition Corp., with a stated purpose of finding acquisitions in the health care sector. It came public at 10, traded up to 175 within two weeks and is now trading for 51. It still has no business plan, no revenues or earnings, and is being looked at by the SEC.

Joan Lappin CFA has been called an “investment guru” by Business Week and a “top manager” by the Wall Street Journal. The Sarasota resident founded Gramercy Capital Management, a registered investment adviser, in 1986. Email her at JLappincfa@gmail.com. Follow her on twitter: @joanlappin. Her past columns appear at heraldtribune.com/business/columns.

This article originally appeared on Sarasota Herald-Tribune: JOAN LAPPIN: More than 1,000 new companies raised $316 billion in 2021