LinkedIn shows it's often best to sit out IPO

Should I be regretting missing out on LinkedIn’s hot initial public offering last month? – A.W., San Antonio

Not at all. LinkedIn is a great reminder of why it’s often best to watch hot IPOs from the sidelines. Here’s how it all worked:

The shares were ultimately priced at $45 by the Wall Street underwriters Morgan Stanley and Merrill Lynch, who pocketed around $25 million for their services. The newly minted shares were distributed by the underwriters, and typically, these shares go to wealthy, favored clients – not to small investors such as us.

The shares commenced trading, though, at $83, giving initial investors an immediate $38-per-share gain. Unfavored investors who rushed in quickly snagged shares at anywhere from $83 to $122 on the stock’s first day.

That might make you lick your chops, but the share price started falling later in the day, as many people sold to lock in gains or avoid losses. After all, many of those folks weren’t long-term investors in the company, but short-term speculators. The shares closed that day around $94, and were recently below $80.

Many people lost money on the stock, and even the company itself might have done better0. Since the 7.84 million shares it sold could have been priced higher, it left gobs of money on the table – much of which went to the underwriters’ clients.

The best IPO strategy is to give a new stock time to settle down and the company time to establish a track record.

Where can I find the most basic introduction to investing? – R.W., Tallahassee, Fla.

Click over to www.fool.com/how-to-invest, or read Peter Lynch’s book, “Learn to Earn” (Simon & Schuster, $15).

MY DUMBEST INVESTMENT

When I was a newbie in the stock market, my dumbest investment was expecting my full-service broker to tell me, in return for hefty commissions and fees, how best to invest. I wish I’d been advised to reinvest my dividends, especially when in 2008 I was buying blue chips and other dividend-paying stocks for a pittance. The dividends would have bought more shares for a pittance, too. I wish I’d been warned to be careful in placing limit orders for stocks. I missed the opportunity to buy hundreds of shares of Ford at $1.02 apiece because my order required a price of $1. – S.A.B., Indianapolis

The Fool responds: It looks like you’ve come a long way, albeit without much help from your full-service broker. These days, those who make their own investment decisions can be well served by what we used to call “discount brokers.” Along with commissions of $10 per trade (or less), many now offer lots of services, such as stock and fund research, planning tools and even banking services. Learn more at www. consumersearch.com/ online-brokers and www. broker.Fool.com.

FOOLISH TRIVIA

I’m the world’s leading tobacco company, selling in about 180 countries. I own seven of the top 15 brands in the world, and my brands include Marlboro, L&M, Bond Street, Chesterfield, Fortune, Parliament and Lark. Marlboro was introduced in 1924 and became the world’s best-selling cigarette in 1972. I’m named after my founder, who opened a tobacco shop in London in 1847. I was spun off from Altria in 2008 to focus on international sales, becoming the world’s fourth-largest global consumer packaged goods company. I sold 900 billion cigarettes in 2010. My logo is rather regal. Who am I?

Last Week’s Trivia Answer: I trace my roots back to London in the 1700s and to companies in the 1800s that were involved in construction and that published Edgar Allan Poe and Nathaniel Hawthorne. Today, with a market value topping $14 billion, I’m the world’s leading education company, a top business information company and a major general publisher. My properties include the Penguin brand, the Financial Times newspaper, and names such as Scott Foresman, Prentice Hall, Addison-Wesley, Allyn and Bacon, Benjamin Cummings, Longman, Putnam, Viking, Dorling Kindersley, Puffin and Ladybird. I have a 50 percent stake in The Economist, as well. Who am I? Answer: Pearson

THE MOTLEY FOOL TAKE

With its baby powder and Band-Aids, Johnson & Johnson (NYSE: JNJ) has long been known as an over-the-counter giant. You may not realize it, but one of the company’s other business segments has begun to drive the company’s future growth.

Consumer goods generated only 13 percent of J&J’s operating profit for 2010, with 40 percent coming from pharmaceuticals and 46 percent from medical devices.

Johnson & Johnson is now the largest medical devices and diagnostic company worldwide. It has focused on treatments for issues ranging from diabetes to vision care, and with its recent purchase of Swiss medical device maker Synthes, orthopedics.

Orthopedics is a growing market. Johnson & Johnson is right at the edge of an exponential market explosion.

The Motley Fool is written by Tom and David Gardner for Universal Press Syndicate. Reach the Gardners at fool@fool.com or by mail to Motley Fool, 1130 Walnut, Kansas City, MO 64106.

Bond Basics

While stocks are shares of ownership in companies, bonds are essentially long-term loans. If a company issues bonds, it’s borrowing cash and promising to pay it back at a certain rate of interest.

Bonds sold by the U.S. government’s Treasury Department are called Treasuries. State and local governments issue municipal bonds, while businesses issue corporate bonds (sometimes called corporate “paper”). Companies perceived as lower in quality are forced to offer high-interest-rate “junk” bonds to attract buyers. The rates are steep because there’s a higher risk that someday the companies won’t have the cash to cover interest payments and the bonds will default.

Bond investors receive regular interest payments from the issuer at the stated “coupon rate.” For example, if you buy a $1,000 bond with a coupon rate of 10 percent, you’ll receive payments of $100 per year. When the bond matures – after perhaps five, 10 or 30 years – you’ll get back your initial loan, called par value. Most corporate bonds have a par value of $1,000, while government bonds can run much higher.

Sometimes a company will “call” its bond, paying back the principal early. All bonds specify whether and how soon they can be called. Federal government bonds are never called. You don’t have to buy a bond at issue and hang on through maturity. Once issued, bonds can be traded among investors, with their prices rising and falling in reaction to changing interest rates.When rates fall, bond prices tend to rise because the bonds seem more attractive. Over the long run, though, bonds rarely beat stocks. According to Jeremy Siegel’s “Stocks for the Long Run” (McGraw-Hill, $35), from 1926 through 2006, long-term government bonds returned a nominal average of 5.5 percent per year, compared with 10.1 percent for the stock market. If you had invested $5,000 in bonds for 50 years, it would have grown to $72,700. In stocks, it would have become $614,200 – quite a difference.