Snapchat IPO, Millennials and the Investing Lessons Learnt

It is common knowledge that millennial’s don’t invest as much as previous generations. There is a plethora of reasons for this with the most common being debt (student loans), stagnant wage growth and fear of another 2008 style crash. But this all seemed to change two month ago with the Snapchat IPO – millennials got excited about investing in the stock market for the first time in a long time.

The following comes from the USA Today just a few days after the company went public in early-March:

“Millennials have largely stayed out of the stock market, held back by student loans, recent memories of the last crash and financial crisis, and a shortage of funds. Brokers and advisers had wondered, given Snapchat’s popularity, if this IPO could entice them in.

The early answer: yes.

Online stock trading app Robinhood, whose core demographic has an average age of 30, says that Thursday was its biggest day ever, and that 43% of all its traders that day went for Snap stock.

“Snap’s IPO revitalized investing among the younger generation,” notes Baiju Bhatt, the co-founder of Robinhood. “We also saw a surge in new accounts, with many new customers opening up their first brokerage account.”
The median age of Robinhood investors buying Snap on Robinhood has been 26, the same age as Snap CEO Evan Spiegel.

As a beginner investor, putting money in an IPO is not the best of ideas. I have laid out my criteria before regarding what I would look for in a stock if I was new to investing. Two factors I look for are stable cash-flows and predictable growth, something companies carrying out IPOs seem to lack – especially in the tech sector!

Looking at SNAP Inc in specific, the offering price was $17 but most individual investors bought their shares on the first trading day when the stock shot up and traded between the $24 – $29 range.

From those opening day highs, Snap is down around 35%. Most of that loss came after the company reported disappointing earnings last Wednesday and the stock proceeded to drop more than 20% following this. It’s still too early tell whether Snapchat will be a successful investment or company but this will serve as a good lesson for these first-time investors.

More experienced investors may be tempted to mock these youngsters for their missteps — and many have — but I personally think it’s a great thing that Snap is getting millennials more interested in the stock market. It’s better to take your losses and lessons when you’re young, inexperienced and have much less money at stake.

Learning how to behave when a stock moves against you is a major part of investing and the learning process. The worst thing that can happen for most inexperienced investors is to see success early with their investments. Early success in this game – especially when buying into stocks you have not forensically analysed – is the worst thing that can happen; it gets you in the mindset of investing being akin to gambling. Lost savings should be thought of as tuition paid. Lost savings should signal to you that making money from investing is anything but easy and you need to really understand a business before you invest in it.

You might think you can handle seeing your hard-earned savings chopped in half or worse but living through it in real-time is unbelievably difficult. No one knows their actual tolerance for risk until this happens.

Fred Schwed, one of the funniest investment writers of all-time, once wrote:
There are certain things that cannot be adequately explained to a virgin by either words or pictures. Nor can any description I might offer here even approximate what it feels like to lose a real chunk of money that you used to own.

The risk-return relationship is one of the most important concepts to understand in finance yet it can be the hardest to accept when losses start piling up. If you want to earn higher long-term returns you’re occasionally going to have to live with gut-wrenching losses. And if you want to avoid gut-wrenching losses you’re going to have to live with lower long-term returns.

The hope is that these initial losses won’t turn these first-time investors off from future risk-taking in stocks. Young people have a huge advantage over all other investors because they have so much time ahead of them to allow their savings to compound. The combination of a long time horizon and future earnings power also gives young investors the opportunity to make up for early mistakes.

It’s hard to get young people interested in plain vanilla index funds so, although buying IPOs isn’t the ideal strategy for young people saving for their future, just getting started is a step in the right direction. Learning about individual businesses is a great way to get people more interested in the stock market.