What Snapchat’s IPO Can Teach You About Investing

Snapchat, the hot social media platform owned by the parent company, Snap, Inc., stepped out onto the big Wall Street stage in the beginning of March this year. Investors and millennials alike snapped it up (couldn’t resist the pun) upon the market’s opening bell. There was a lot to be excited about with Snap’s IPO: the opportunity to be an “investor” in an app you use every day to connect with friends as well as the eye-bulging sales growth rate of over 585% from 2015–2016.

But do these facts make it a good company to own as an investment?

This article in the Wall Street Journal shares why young people are drawn to Snap as an investment. An interview with one of Snap’s young buyers, in particular, seems to capture the sentiments many millennials feel when making any sort of investment decision:

“Kaleana Markley, a 29-year-old wellness consultant who lives in San Francisco bought $100 shares on Thursday…. “I have high hopes” for Snap, Ms. Markley said. “I think they are doing really cool things.” She doesn’t do much investing generally, citing student loans and the high cost of living in the Bay Area but got excited by the talk of the IPO. One promising sign of the company’s growth prospects she said: Even her parents are using it now.”

While we all feel like we should be investing, we often hesitate for fear of making a mistake. However, when the opportunity comes to purchase a company we are already familiar with, it might just be enough to take the plunge into investing. Heck, why not?

Well, there are a few things worth discussing first. While I can’t say if Snap will end up playing out, I can exhort you to realize that what you buy isn’t as important as why you buy it. You may, in fact, be speculating and hurting your returns rather than investing. For example, Snap recently released its debut quarter earnings. The company posted its slowest year-over-year growth rate in at least two years. The result? Shares fell 23% in after-hours trading. Ouch.

Before jumping into an investment, ask yourself these three questions:

1. Am I emotionally invested in this?

Good investing is rarely exciting. Ms. Markley has “high hopes” and “got excited by the talk of the IPO.”

The danger of investing with emotion is it leads to poor decisions made at the wrong time. Emotions may cause you to buy when the stock market is going up so as not to miss out on the rising market and to sell when the stock market is going down to protect against any losses. It’s the exact opposite of investing 101: buy low, sell high.

In hindsight, the best time to get into stocks was in Q1 of 2009. Was anyone talking about the exciting prospects of buying securities on sale then? No, the sorrow of the paper losses on portfolios led people to sell at the bottom. They let their emotions dictate their investment decisions. Warren Buffet’s words ring true when he says investing is rather simple, but that is far from saying it is easy.

If excitement is what you are after, look somewhere else to gain your enjoyment. Your portfolio should not be the thrill; it should serve you to support the more interesting things in your life.

2. Am I falling into the mental accounting trap?

Mental accounting refers to the tendency for people to separate their money into separate accounts based on a variety of subjective criteria, like the source of the money and intent for each account. Ms. Markley has segregated her investment account from her student loan debt and cost of living expenses, justifying one investment without considering the other possible better uses of that money.

If you have a student loan with a 6% interest rate, do you want to know how to guarantee yourself a high rate of return? Pay off your student loan and you will “earn” for yourself the rate you would have spent paying interest each year. Snap may, in fact, post a better return than 6% over the long term, or it could not be in existence in 10 years. Time will tell, but its return is certainly not guaranteed. Take the guarantee before diving into risk.

3. Do I have an investment plan?

While we can only hypothecate from the short quote in the article, I can bet that Ms. Markley isn’t headed toward a specific goal, financially speaking. It more feels like she has things pulling her in different directions. This is not how you win with investing.

Have a plan to avoid succumbing to your emotions or falling into the mental accounting trap. Most people financially wander through life hoping they will have enough to retire on. You need a written out plan, detailing this is what I want to accomplish and this is how I’m going to do it. Your plan can be simple: “I’m going to save X% from every paycheck and use it to pay extra on my student loan.” Remember, as Zig Ziglar says, “If you aim at nothing, you’ll hit it every time.”

Clearly, there is more to it than a simple buy/sell recommendation for some Snap, Inc. shares, but it brings to light some important questions to ask yourself before you make a decision. Remember, an investor has a plan; a speculator is motivated by short term gains and excitement. As a young professional, these decisions play a major role in how your retirement will look later in life.

Be sure you are considering the purpose behind the purchase rather than the thrill of the purchase itself, as the dreamy vision of quick gains may come crashing down.

This post originally appeared on the Aldrich blog.