As a group, fresh IPOs tend to rally about 7% a year in the opening phase of their Wall Street career… across boom and bust, bull and bear markets. That’s not bad. It just hasn’t happened lately.

Elite early-stage investment funds (“VCs”) will then add a few points of performance by picking through the pipeline to weed out obviously flawed deals while doubling up on the ones with real long-term potential.

The sweet spot in VC land clocks in at about 11.6% compounded across the holding period. If they can ring that bell, their millionaire clients will feel satisfied paying for the ride.

(Don’t tell them money in the IPO Edge strategy has moved up at an annualized rate of 26.38% over the years, without all the suspense of waiting a full decade to reveal the results. That’s our secret!)

But thanks to all the Fed machinations of the last few years, the pipeline got choked. The average company getting in front of the public ended up dropping 10% from its starting price.

That’s when the IPO Index started a harrowing plunge that bent the historical limits. Worst performance EVER… and that’s counting the dot-com crash.

While Wall Street has worked hard to pivot around the Fed, most of the deals still aren’t connecting. These are “rebuilding” years.

The average IPO in 2023 dropped 15% in 2023. I hate to think what will happen to the VCs when their fancy clients get their statements.

Yet the average exit on the IPO Edge in 2023 clocked in at 19.78%. Do the math on that spread: the pipeline coughed out a 15% negative return, we converted it into virtually a 20% profit… while keeping some massive winners active on the screen.

Return To Statistical Sanity

And that’s what we can do in a “rebuilding” year, where Wall Street is still struggling to build deals that resonate in the current market mood.

Think of what we can do once the Fed finally takes its foot off the brake. I’m not anticipating a 1999-style bubble here or even a boom. All we want is a return to “normal.”

Here’s the thing about “normal.” Over the long haul, all the extremes converge and the statistical averages end up rising back to the surface.

The trend is the trend because that’s where most of the outcomes play out. The scientific term for this is the reversion to the mean:

* The “mean” is the normal, the average. As you accumulate data points, you can predict with greater confidence that the mean will triumph in the end.

* “Reversion” means that extreme deviations from the mean will cancel out over time. That’s how the mean gets built, data point by data point.

Like I said, I am not betting on 2024 being a fantastic year in the IPO market. Wall Street is still trying a little too hard to get its groove back.

We are a long way from “fantastic” when the highest-profile deals get no respect. But as the market mood heals and the underwriters finally remember how to package their offerings, there will be another boom.

And then there will be another bubble. And then another bust. The important thing at this point in the cycle is that things are getting better, moving in the right direction.

Forget “fantastic.” As strained as the statistics are, the coming year has strong odds of giving investors something a lot closer to a “normal” ride . . . if not better.

Even if something goes wrong and Wall Street falls back into weak and lazy habits, the IPO Edge outperformed by 35 percentage points in a “bad” year, right? Think of what we can do when we get a little wind blowing in the right direction for a change!

You don’t have to think about it. I’ve been a professional investor going back to the 1980s and I can tell you how it works.

Peek Behind The VC Curtain

Systematic investing in early-stage stocks requires two essential points of conviction.

First, you need to accept the fact that reaching for spectacular outcomes means opening yourself up to devastating losses. No return without risk.

Second, you need diversification. Many of the best-looking small companies will fail. Take a portfolio-oriented approach and raise the odds that you’ll also pick a big winner.

In the elite world of the VCs, these principles translate into accepting that at least 25% of your most carefully researched positions will deliver ZERO return on capital.

That’s not the same as breaking even. We’re looking at a 100% failure, a complete crash. And plenty of VCs will let this “loss ratio” ride to 40% before breaking a sweat.

Take 10 stocks. As many as 4 drop to zero, giving NOTHING back. How is this sustainable? How is it even possible? Is it a scam?

Millionaires keep signing up for these funds and even pay exorbitant fees (2% a year plus 20% of the profit) because the rest of the portfolio does well enough to overcome the drag from that 25-40% total loss.

This isn’t rocket science. It’s math. The corporate giants of tomorrow start out as the small stocks of today. Some fail, but the ones that thrive more than make up for it.

Think back to the late 1990s when you could grab trillion-dollar names like Amazon (AMZN) for $18 per share… and AI powerhouse NVIDIA (NVDA) was available at a split-adjusted $1. Calculate those long-term returns!

Back then, these were unknown companies pursuing untested business models. The Wall Street establishment steered clear, calling the stocks too speculative for comfort.

I’ll admit, many of the IPOs of that era crashed hard and never recovered. But here we are, 30 years later and Warren Buffett himself regularly regrets his lack of vision in failing to grab the Magnificent 7 on opening day.

Here’s the basic math that keeps the VC wheels turning: you can only lose 100% on any position before the pain stops. That’s as bad as it gets. But as the lesson of NVDA at $1 reveals, a good bet can return much, much more than 100% in profit.

In the IPO Edge, we do things a little differently. I’m not a fan of letting obvious losers ride a full decade, which means we usually bail out before taking a full 100% loss… but our people have learned to live with numbers that look gruesome to beginners.

Take an 80% loss as a hypothetical loss threshold. Looks bad, right? As it turns out, a full 25% of the stocks that went public in 2023 are currently carrying that kind of pain.

Only four stocks in IPO Edge history had a similar drag on our overall score. Meanwhile, about 14% of our positions have been bona fide moon shots, each giving us a chance to capture a 110-950% return.

Stack those extremes of agony and ecstasy against a typical VC portfolio and you have the IPO “edge.” Our winners are huge and relatively numerous (VC generally cheers if 10% of the bets are moon shots) while our loss ratio is just enough of an improvement to make a tangible difference.

And the stocks in the middle contribute to the overall score. That’s the ground game for us and the VCs. I like to think we have an advantage there as well… and as the “average” regresses up toward normal, we’ll do even better on that side.

But let’s focus on the extreme scenarios for a moment. Add up our historical moon shots and then subtract an equal number of our worst losses to calculate the net impact of reaching for so many home runs and hitting a lot of foul balls along the way.

Want to know more? All the details are HERE.