How to Evaluate If an IPO Is Worth Buying

IPO fever is real -- when a high-profile company goes public, the media frenzy and social media hype create an almost irresistible urge to buy in on day one. But the greatest investors in history approach IPOs with extreme caution, and for very good reasons.

Warren Buffett has famously avoided IPOs for virtually his entire career. His reasoning is characteristically clear: IPOs are designed to be sold, not bought. The company and its investment bankers have every incentive to price the offering at the maximum the market will bear. They have teams of analysts, lawyers, and marketing professionals whose job is to make the company look as attractive as possible. You, the individual investor, are on the other side of that transaction -- and the information asymmetry is massive.

Benjamin Graham warned that new issues are sold under favorable market conditions -- favorable for the seller, that is. Companies choose to go public when market sentiment is optimistic and valuations are high. This is precisely the opposite of what a value investor wants: you are buying when the seller has timed the market to get the highest possible price.

Peter Lynch offered a practical rule: wait at least a year after an IPO before considering buying. By then, the lockup period has expired (meaning insiders can sell), the initial hype has faded, and you have at least a few quarters of public financial data to analyze. Many IPOs decline significantly in the first year as reality replaces hype, giving patient investors a better entry point.

Howard Marks reminds us that IPO stands for "It's Probably Overpriced" in the minds of experienced value investors. The excitement surrounding a new listing is exactly the type of first-level thinking that leads to overpaying. Second-level thinking asks: if this company is so wonderful, why are the current owners selling their shares to me?

Charlie Munger adds that the incentive structure of IPOs is fundamentally misaligned with investor interests. The investment banks earn fees based on the deal size, the company's early investors want to cash out at a high price, and the retail investor is the last link in this chain.

Here is a practical framework for evaluating any IPO:

Your Action Plan

The Bottom Line

Most wealth is built by buying proven businesses at fair prices, not by chasing the latest new listing.