For the past few weeks, the financial media has not stopped talking about the Chinese company Alibaba, which is going public this Friday. My biggest concern is that the retail investor is going to get screwed because they have been brainwashed that this will be the greatest IPO ever and they HAVE to buy it.

Here’s some historical perspective (i.e. two examples of companies that were also “hyped up” before their IPOs):

1) $BIDU – Baidu was touted for months as the “Google of China.” On 8/5/2005, they priced the IPO at $27. It opened at $66 and ran to $151.20 before closing at $122.50. Keep in mind, these are split adjusted prices and this was all in ONE DAY of trading! Here’s the problem: Over the next 6 months, the stock dropped to $44 and it didn’t take out its IPO high until June 2007. In other words, if you chased it anywhere above $120 on the day of the IPO, you had to wait almost TWO YEARS to get back to even!

2) $FB – Facebook is a more recent example. This was talked about for months before its IPO on 5/18/12. They priced the offering at $38, it ran up to $45, there was a computer glitch at the Nasdaq that day, and it eventually closed at $38.23. Over the next 4 months, the stock dropped to $18 before finally taking out its IPO high in September 2013…16 MONTHS LATER!

Although both of these companies have been great longer-term investments, if you chased them on the day of their IPO, you would have been underwater for a long time. Now I realize there have been other IPOs (such as $GOOGL) that opened strong and never looked back, but at least $GOOGL offered a great IPO base (a month after it went public) before it made its huge move.

If you already have shares of $BABA before it opens on Friday, congratulations! Your biggest decision will be: Do I hold this for the long term? Or should I flip my shares on the open? That is for you to decide based on your timeframe, investment philosophy, risk tolerance, etc. My best advice is to put together a plan (if you don’t have one already).

If you are looking to buy this AFTER it opens, my best advice is to wait. Of course it could take off and be a great long-term investment, but I think the risk of chasing all this hype might hurt the average investor. It’s best to wait for the stock to form an IPO base (or some sort of consolidation) before committing capital. Besides, there are 6,000 other stocks in the market, and you don’t HAVE to get involved with this on Day 1.

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