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In the wake of the Groupon stock implosion, some pundits are bemoaning the government’s plan to modestly relax regulations on small public companies by implementing the JOBS Act.The normally very clear-eyed Andrew Ross Sorkin, for example, has suggested that, before he signs the bill, President Obama should look at what just happened to Groupon investors.
What just happened to Groupon investors?
Well, those who bought Groupon the IPO price or immediately after the IPO–and held onto it–have gotten demolished.
So, we should tighten IPO regulations, not weaken them, right?
The reason investors lost money on Groupon, as well as Demand Media, Pandora, and other flame-out IPOs, is not that regulation failed. It’s that the investors paid too much for the stocks.
The SEC gave Groupon a proctology exam before it went public. That didn’t stop the stock from cratering. And it cratered long before the embarrassing earnings restatement Groupon announced last Friday.
And it’s not as though there wasn’t a healthy diversity of opinion about Groupon’s prospects before and after the IPO.
Many analysts, including Jim Cramer and yours truly, were screaming from the rooftops that Groupon was overvalued–a crash waiting to happen. (See, “I Wouldn’t Touch Groupon’s Stock With A 50-Foot Pole.“)
Investors who bought Groupon on the IPO chose to ignore these warnings. Importantly, these Groupon bulls might have been right. That’s what makes a market, after all. One investor on each side of the trade, one of whom is right, the other of whom is wrong.
Every time a share of stock trades–which happens about a billion times a day on the NYSE alone–one investor makes money and another investor loses money. These gains and losses go hand in hand with stock market investing. And all the regulation in the world will never change that.
Importantly, the gains and losses don’t just happen with innocent mum and pop investors (who should never, ever buy stocks like Groupon). They happen with professionals, too. Just think of all the professionals who got their clocks cleaned in all the bank and housing stocks in 2008 and 2009. Just look at hedge-fund genius John Paulson, who incinerated half of his clients’ money last year.
Why does stock-market investing cause so much pain?
Because stock-market investing, especially short-term stock market investing, especially concentrated stock-market investing, is risky.
The stock market is not an FDIC-insured savings account.
It’s not a government insured Treasury bond.
It is a stock market.
It offers the potential for high return in exchange for high risk.
Even the most cursory glance at history shows that stock markets do not just gradually and safely appreciate. Rather, they boom and crash.
And this is especially true for high-risk, high-reward technology stocks like Groupon.
Investors who don’t like that should not go whining to the government for protection from stock-market losses. They should stop investing in the stock market. Or they should at the very least stop buying hot tech IPOs..
The SEC has now launched an inquiry into Groupon’s earnings restatement, presumably to figure out whether the company committed fraud.
If Groupon committed fraud, the SEC should prosecute that fraud.
But investors should also realise that the vast majority of stock-market losses have nothing to do with fraud. They have to do with volatility and risk that goes hand in hand with stock-market investing.
Nothing the government does will ever change that.
And in the interests of encouraging innovation and job-growth, the government can–and should–make it easier for emerging companies to raise capital from investors who voluntarily choose to take big risks in search of big rewards. These investors should be viewed as the adults they are, not as children. And they should take full responsibility for their decisions.
There’s no free lunch in investing.
You can’t get big returns without taking big risks.
And nothing will ever change that–even all the regulation in the world.
(PS: Fortunately, there are simple ways to lessen stock-investing risk: Buy diversified, low-cost index funds and own them for decades. That’s what most smart investors do with their own money, if not their clients’ money. See: FINALLY, SOME DECENT INVESTMENT ADVICE: Don’t Play The Losers’ Game.)
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