Mike J. from Cambridge, MA asks: Hello Mitch, I’ve been reading a lot lately about Special Purpose Acquisition Companies, and was thinking about investing in one. Curious to hear your thoughts on them, maybe some pros and cons, etc. Thank you.
Mitch’s Response:
Thanks for writing, Mike. Special purpose acquisition companies (SPACs) have been the talk of the town in 2020, with a record amount of deal-making and heightened investor interest. I’m glad you asked about them. There have been an increasing number of first-time SPAC investors this year, and I’m concerned that some folks are not doing enough research and due diligence before investing.
Let me start by explaining what SPACs are, for readers who may not be familiar. SPACs have also been called “blank check companies,” as they are essentially shell companies formed to raise enormous amounts of cash. SPACs raise the cash in order to then target and acquire companies—often start-ups with flashy new products and growth profiles—with the ultimate goal of taking the company public at windfall-generating valuations.1
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9 of the Biggest Financial Mistakes to Avoid When Planning Your Retirement
It’s important for investors to take their time when considering future financial situations. Trying to find a one-size-fits-all strategy for investing could lead to future mistakes. When planning for your retirement, questions may spark – What does the future look like for me? What mistakes can I avoid?
See what we believe are the biggest mistakes investors make when planning for their financial future and how to avoid them with our guide, “9 Retirement Mistakes to Avoid.”
If you have $500,000 or more to invest and want to learn more, click on the link below:
Learn About the 9 Retirement Mistakes to Avoid!2
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The appeal of SPACs is the same type of appeal that draws investors to the IPO markets: the possibility of fast, outsized returns gained from investing in a small start-up or a company with major growth potential. But on the other side of the SPAC coin is what investors should expect to find – high risk.
For one, start-ups and other companies that go public via SPACs don’t face the same constraints as traditional IPOs, particularly in the realm of financial disclosures and projections. For instance, companies that go public via SPACs often tout wildly positive growth expectations, but traditional IPOs would be sued by the federal government for doing the same thing.
Here’s a case-in-point for you: through mid-November, SPACs had announced 71 deals with target companies (a record). But upon closer examination, you find that 15 of these SPAC companies made no revenue last year. One recent, noteworthy deal involved an electric-vehicle maker named Fisker Inc, which went public in October via a SPAC with a $4 billion market capitalization. The company projected it would make over $13 billion in revenue by 2025. These are huge numbers, but guess what – to date, Fisker hasn’t generated a penny of revenue. Long-time readers of my columns know this isn’t the type of investment I’m very interested in.
What’s more, SPACs do not have a very good record of delivering returns. Of the 107 SPACs that have gone public since 2015, their stock’s average return has been about 1.5%. Over the same period, companies that went public via IPO sport an average return of 49%. 2020 has been a much better year for SPACs, to be sure, with the year-to-date average return hovering around 17%. Maybe this is where a lot of the interest is coming from today. But I’d urge readers to understand what you’re buying, and to take extra time to scrutinize what valuation you’re paying for future cash flows. In some cases, a SPAC investment may mean investing in companies that have yet to generate positive cash flows. That’s not a very sound long-term strategy, in my view.
One mistake we have seen investors make is focusing on short-term movements without paying attention to key details or the long-term outlook. We advise you to not fall prey to this mistake.
There are common mistakes and habits that we believe can help some investors succeed while others fail. To help you understand some of these mistakes and how to avoid them, we have created the guide, “9 Retirement Mistakes to Avoid.”4
In this guide, we provide our thoughts on what we believe are 9 of the biggest retirement mistakes investors should avoid. If you have $500,000 or more to invest and want to learn more, click on the link below:
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