Let your winners ride
Funding SpaceX’s record IPO: the psychology behind the selling
If its S-1 is anything to go by, today’s SpaceX IPO is a historic moment not just for financial markets, but for humanity.
The company will debut on the Nasdaq later today, with a valuation of more than $1.75 trillion. The IPO is said to be oversubscribed several times over: insatiable demand, potentially propelling Elon Musk to trillionaire status, and, if the firm delivers its vision, accelerating our journey to the stars.
I’ve received a barrage of notifications and emails from brokers sharing details of the IPO. Even companies like Revolut are running adverts on YouTube.
You can’t escape Musk’s big moment.
The minimum investment on my preferred platform, Interactive Investor, is $500. An unusually large slice of the offering is being reserved for retail investors. Combined with institutional interest, the deal is set to raise $75 billion and break the record for the largest IPO in history - taking the crown from Saudi Aramco’s 2019 listing and nearly tripling the previous benchmark.
BNP Paribas estimates retail and passive flows into the IPO could reach $50 billion - money that, for the most part, has to be liquidated from elsewhere. The wider market has churned under the weight of the deal and the liquidity it has required.
Leading AI and semiconductor stocks weren’t spared. The Philadelphia Semiconductor Index dropped 10% in one session last week. SpaceX wasn’t the only culprit - weak guidance played its part - but warnings that the IPO could exacerbate selling followed, with investors liquidating their big winners to chase the new one.
Recent moves in precious metals and Bitcoin could be further evidence of money being raised. Both are accessible, highly liquid pools of capital.
More interesting is the psychology behind the selling. What drives an investor to sell one asset over another - a concept known as the disposition effect.
The disposition effect is the tendency of investors to sell their winners and hold on to their losers. It’s selling Nvidia, but keeping BT.
Humans never want to lose. Nor do we like to admit when we are wrong. These are basic instincts that shape society, but also financial markets: humans are more likely to bank a profit than admit a mistake.
Research shows that even professional investors are prone to this behaviour.
The effect isn’t grounded in a person’s intelligence, but in their pride - the niggling feeling that a company in the red might still turn things around.
Some of the first hard data on the effect came in 1998, when a finance professor named Terrance Odean analysed the trading records of 10,000 brokerage accounts. To test the disposition effect, he didn’t just count what people sold. He also looked at what they could have sold.
On any day an investor decided to make a sale, Odean tracked the winning stocks they chose to cash in on, compared to the losing stocks they left untouched in their accounts. On average, investors sold roughly 15% of the winning positions available, but only about 10% of their losing ones. They were 50% more likely to sell a winning stock than one losing money.
The resistance to cutting a loss carries a price. Data shows the winners people sold went on to beat the losers they kept by 3.4% over the following year. Prematurely cashing in winners and letting the losers decay could mean missing out on thousands in potential portfolio returns.
The lesson, and the phrase now echoed by the US finance and technology community, including Musk acquaintance and fellow PayPal mafioso David Sacks: let your winners ride.
The disposition effect has decades of data behind it. On average, the assets investors sold went on to outperform what they kept. The picture gets muddier when the money is used to back a company unprecedented in its ambition, now valued in the trillions.
If there ever was an exception to the rule, it feels like SpaceX. A company that lands reusable rockets, runs a satellite internet network covering the planet, and owns xAI.
I won’t be investing in today’s IPO. Saving for a few days in the Mediterranean and all that. But I will be watching it closely. For those buying in, keep the disposition effect in mind, and if SpaceX is the galactic game-changer it’s made out to be - let it ride.