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Why I’m Not Investing in a New Medical IPO

An IPO or Initial Public Offering is a company’s first stock offering to public investors. Basically, it happens when a company “goes public” or starts selling their stock broadly rather than keeping it to private investors only. And recently, a major medical company set their IPO and even began to offer pre-IPO shares to certain physician members.

I did not buy these pre-IPO shares. That was an unpopular choice gauging by public opinion. But let me explain…

More background first

The company in question is one that most physicians will be at least familiar with. I will not name them here for the simple reason that I don’t want my lack of share purchase to be considered as a “knock” on them. Not that I even have such an influential reputation 🙂

In fact, I rather like this company. I believe in their mission. I use their products. Heck, I even recommend some of their products to my colleagues who have used them with positive review.

medical IPO

But I am still not buying this medical company’s IPO.

The medical IPO offer

The company is offering reserve shares of its IPO shares to members. They set aside a certain proportion of the shares for this purpose.

They capped the investment amount at $5,000/member.

That’s the offer.

Is it a good one?

No clue.

Honestly, I have no idea. I’m not sure how many shares that $5,000 would buy. Even if I did, I have no idea how much those shares are really worth.

And even more, I have no idea how the stock will perform once it released. In the short term. Or in the long term.

Again, I like the company. But all of these variables are unsolvable for me. And unless your crystal ball is less cloudy, they are probably not solvable for you either.

C’mon Jordan, have a little fun!

Trust me. A little voice in the back of my head was saying exactly this. $5,000 is a small percentage of my investment portfolio. Selenid and I definitely could invest that and just see what happens. Ride it out.

Worst that happens is we lose $5,000 but have some fun, right?

Maybe. Maybe not.

Anyway, let’s get into the reasons why I will not buy shares of this medical company IPO

1. Please see above

I want my investments to be equivalent to my risk tolerance. That means I want them to be somewhat reliable and tested. I want not to have to rely on my crystal ball. Or make a horse bet.

I like to have a modicum of expectation of long term performance. Or at least to know roughly what they are worth within a market. I just explained above that this investment meets none of these criteria.

Index fund investing lets me do that.

Individual stock investing does not. It’s that simple.

It has nothing to do with the company or its products/services. I have no problem with that. I have a problem with individual stock investing, trying to beat the market, and IPOs in general.

2. I may actually invest in it

Huh?

Well, that’s the beauty of index fund investing, right? If the company actually does really well, it will be incorporated in the index funds that I invest in.

So I’ll just be patient and minimize my risk. Sure I cap my rewards a bit if the stock really takes off. But I am willing to accept that.

Related Post:
My Stock Portfolio Is Better Than Your Financial Advisor’s

I have a simple formula for wealth. I don’t need to take unnecessary risk to reach my goals.

3. My investment plan tells me not to

I made an investment plan with Selenid for a reason.

It’s our guide, our treasure map. We follow it and we reach financial freedom.

Our financial plan tells us how we will invest in stocks and equities. We will invest in broadly diversified low cost index funds according to our asset allocation and re-balance once a year.

Nothing about individual stocks. So we don’t do it. Even when tempting opportunities come up.

In fact, our plan says we have to both agree to any alteration in the plan and wait 3 months before enacting them. If an investment is a good idea now, it will still be in 3 months.

4. I’m self aware of my familiarity bias

Familiarity bias is when we feel that an investment is good, or even worthwhile, because we are familiar with it. 

We feel that we have some “insider” knowledge of a product, industry, field, technology, you name it. So, we believe that we can leverage this familiarity and perceived knowledge to invest and outperform the market.

This plays out allllll the time, especially in stock investing. Someone works in product development and thinks some new technology will push some product into the stratosphere. So they buy some stock in the company with the technology and/or product.

This does not work out well.

Related Post:
Don’t Fall Victim To Familiarity Bias in Your Investment Strategy

Turns out, we are not good at picking stocks. Even when we are familiar with the product or service. In fact, we might be worse when we are familiar with the product or service.

So, nice try. Not falling for that one…

5. I can invest the money in better ways

This again goes back to my financial plan. In the plan, we have a financial priority list. Basically, each item on the list is where our savings sequentially goes.

Emergency fund…paying off debt…403(b)s…real estate….etc. on down the line.

Well, not only is individual stock investing not on this financial priority list. But there are still items on the list that we have not invested in because our savings haven’t stretched that far yet.

Things like a backdoor Roth IRA.

Related Post:
3 Reasons I Don’t Invest in a Backdoor Roth IRA

So, I’d much sooner take than $5,000 and stick it in a backdoor Roth. There I would invest it according to my asset allocation in broadly diversified index funds.

And that is why I will not be investing in this particular (or any others in all likelihood) IPO.

What do you think? Have you invested in an IPO? In individual stocks? Would you do it again? Why or why not? Let me know in the comments below!

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    The Prudent Plastic Surgeon

    Jordan Frey MD, a plastic surgeon in Buffalo, NY, is one of the fastest-growing physician finance bloggers in the world. See how he went from financially clueless to increasing his net worth by $1M in 1 year and how you can do the same! Feel free to send Jordan a message at [email protected]

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