Tuesday, September 10, 2013

Profiting from the Twitter IPO

Twitter IPO: The Anticipation Trades by Market Authority

If you want to make good money, go in through the back door.

The big boys of Wall Street are at the front of the line…

You’re not even in the building. I’m sorry to say that. But it’s true.

In December 2011, smart investors scoured the markets for the best way to trade Facebook (FB) – a stock absurdly priced at 99x earnings right out of the gate.

The best way to trade it was by buying the First Trust IPOX-100 Index (FPX) months ahead of the Facebook IPO.

By doing so, you stand to profit from the “anticipatory momentum” behind the name.

Instead, at the time, we were politely told:

“Only a fool would buy that here. I’m just going to buy the Facebook stock when it comes out. You have no idea what you’re talking about.”

That’s fine, I thought. Do what you must.

But as you’ll see in the chart, FPX ran from $20 to $26 ahead of the FB IPO.



The Global X Social Media Index ETF (SOCL) exploded.



Facebook – on the other hand – was spoiled by mismanagement and technical glitches that cost investors millions on May 18, 2012.

Facebook plunged…

It was embarrassing.



Why am I telling you this today?

FPX and SOCL are likely to pop again as we near the Twitter IPO.

As we’ve seen with other social networking IPOs, things don’t usually end well out of the gate for the “prized” sought-after stocks.

On the first day of trading, everyone and their grandmother will run out to buy Twitter shares.

Demand will outstrip supply.

And, as with many highly sought-after stocks, the game is rigged. You’re way at the back of the line – behind the Big Boys.

We’ve seen this play out before…

Small investors who took a swipe at LinkedIn (LNKD) on its first day watched their investments crash and burn:



Groupon (GRPN) got crushed just weeks after going public:



And RenRen (NASDAQ: RENN), “the Facebook of China,” fell 75%.



There’s too much excitement.

The only way to profit from these social networking names is to profit from the anticipatory momentum.

Wait for them to crash.

Then buy at the bottom and wait.

I do not expect Twitter’s initial public outing to be successful for long.

If you want to make good money, go in through the back door.

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