As unicorns like WeWork and Uber test the IPO market with disastrous results, America's biggest wealth manager for the ultrarich shares his best strategies for investing in unproven giants

• Peter Mallouk of Creative Planning has been named one of the best wealth managers in the country by Forbes and Barron's, and his firm manages $40 billion in assets.
• Mallouk says he always warns clients not to invest in a company for at least a year after its initial public offering. The WeWork debacle and the public-market struggles of companies like Uber illustrate why he's so cautious.
• While stock market unicorns are under fire, Mallouk tells Business Insider he's not against investing in private companies that aren't making money.
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Few things get Wall Street excited like a big IPO, but you might be better off skipping the party.

That's how Peter Mallouk handles investing in newly public companies for his clients. The founder and president of Creative Planning, Mallouk manages $40 billion in wealth for clients with anywhere from $500,000 to more than $100 million in assets. Barron's also named him the best independent wealth adviser in the US from 2013 to 2015, as well as in 2017.

If one of his clients is intrigued by a new stock like Uber, Lyft, or Peloton, he tells them to wait a year so they can learn more about the company's business.

"We are largely negative on investing in companies right when they go public, and much prefer the scrutiny of the public market for a period of time before we invest," he said in an exclusive interview with Business Insider.

Companies are required by law to disclose far more information about their businesses once they file for an IPO and go public, while standards for private companies are much lower. Mallouk says some investors take brutal advantage of this, which makes it essentially a stroke of luck that the public didn't lose a lot of money investing in WeWork the way private investors did.

"It's also an example of the crap that Wall Street will dump on the American public," he said. "They knew this was an unprofitable mess, and they thought they had a good narrative and a good story, and they thought they'd just dump it on Main Street. Fortunately for Main Street, the story fell apart just weeks before the IPO."

After some public filings and earnings reports, Mallouk says he'll know much more about a company and can make a better-informed decision about it.

"You want the stock to go through some public scrutiny," he said. "We can usually invest at a lower price and having a much better understanding of what the company is about once it's had to go through a few quarterly calls and we see what the insiders do."

Why insiders matter

Company insiders are likely to sell some shares three or six months after an IPO, which will almost always drive the stock price down for a time. How much they sell can be an important indicator of how much confidence people with the most knowledge have in the stock.

An investor who is a big fan of a newly-public company might believe it's destined for success and huge gains on the stock market. But Mallouk warns that even a company that looks like it will blast off right after its IPO is likely to come back to earth quickly.

"Most IPOs, I think this surprises most people, trade below their IPO price just half a year later," he said.

That's certainly been the case this year, even though the poor performance of several unicorn IPOs has caused some alarm.

His approach to private companies

That list of concerns might create the impression that Mallouk wouldn't invest in a company that's losing money, or that he steers clear of the private market. He says that's not the case, and he's not opposed to putting a client's money in a company that's unprofitable as long as it has a path to making money in the future.

And he's entirely willing to make private market investments on behalf of his wealthier clients. But he prefers investing in private equity funds and not single companies to reduce their risk.

"If you have a WeWork in there, it's not going to kill you," he said.

He adds that the private market differs from the public market in a critical way: A manager's track record matters much more, and is more predictive of how their investments will do in the future.

"In the private space we're much more focused on the managers and their track record and the firms that back them up," he said. "We like to see mangers that have been doing this, preferably, for a decade or more with consistently outperforming their peers."

Spread out your risk

For investors who aren't extremely wealthy, Mallouk also prefers to spread his bets, preferring broad-based indexing to picking stocks. He argues that by buying an index, investors can benefit from multiple successful IPOs instead of trying to choose the biggest winners, and that unlike stock picking, indexing has far more upside and limited downside.

He uses some of the most famous winners and losers in recent market history as examples.

"The worst Lehman Brothers can do is go down 100%, but lots of stocks go up thousands and thousands of percent like Amazon, Apple and so on," he said.