IPOs-Some Most Important Things to know about. And why stay
clear of most IPOs.
WHEN ITS HOT AND FIREY!
IPOs only and only come in hot and bull
market. Why? So that they can obtain the highest price.
MERCHANT BANKERS AIN’T YOUR FRIEND
Investors forget that Merchant Bankers are
selling agents of the issuers. And many times they are also given extra fee for
performance selling over and above fixed fee.
Merchant/Investment banking is a cream
business. So many are in race to get mandates for IPOs from issuer companies.
They will do everything to please the company.
SELL ON LISTING? If you’re lucky enough.
Most investors have only one funda for
investing in IPOs.
To sell on listing!
They all think that they will be able to sell
and outsmart everyone else. They all feel so because of psychology. They have
seen some issues listing at high premium and their listing premiums quoting in
so called ‘gray-market’; and this brings the representative bias. The
availability bias makes him confront only good and positive news and
information. They ignore the discounted/failed listed IPOs. And in hot market
there is all news of economic growth as well.
New sectors are not invented every now and
then: The fad and fancy for ‘new’ in markets:
Many IPOs come which are highly pricey and
shares of some peer company are already available in secondary market. Still
investors buy/subscribe to such IPOs. Because they have tend to believe that
(in bull market) ‘IPOs are a sure thing”, which is surely a misconception.
This is a fact that investors have lost more
money and taken a hit on the return on their capital. Investing in IPOs.
FRESH BUYING ON LISTING?
Many investors buy stocks on listing day. This
is another mistake the investor can make. If one is not allotted shares in IPO
than one tries to buy it on listing day and try to become the proud owner. So
what if he didn’t get allotment?
Observe yourself and you will every time find
that your obsession for buying the new kid on the block or IPO of any stock is
only due to one or more bias out of ‘availability bias’, ‘recency effect’, or
‘representative bias’. The Availability bias happens due to hoard of available
information/recommendation etc. on the new IPO. You see hoardings
advertisements, IPO forms at your brokers’ place, advertisement in blue
channels and news papers, chats and recommendation given in all this medias as
well. Thus you are provided with constant ‘available’ information/input load
about the new IPO. The ‘recency effect’ deceits you by way of others making you
believe or you making yourself believe that some recent xyz listed IPO got good
gains on listing. And interestingly the ‘recency effect’ works on one way
straight at a time. In that it you only look at successful IPOs on lusting and
even though there may be fair number of IPOs listed on discount, it will not
consider them. Strange but true! The successful IPOs become ‘representative; of
all the following ones.
THINK ABOUT THIS:
Investors and money managers, advisors and
brokers put a lot of emphasis on PE and other ratios and financials etc.
parameters when it come to investing or judging listed (old) stocks. But HOW
THEY TEND TO OVERLOOK ALL THESE FOR AN IPO STOCK IS a matter of astonishment!
Why do not they employ similar rigour while looking at or advising on IPO
stock?
ALL COMPANIES ARE NOT SO GOOD:
For e.g. Power grid Corp gave 50% gains on
listing. But this doesn’t mean that all government companies’ IPOs give good
returns. Or power companies are good and give good returns.
If/when investors think so then they are
playing pray to ‘representative and availability heuristics’. They are plagued
with Recency bias.
SOME CAUTIONS:
Investors with a clear goal of making money on
listing must bear in mind that it is most of time a luck game with IPOs. Remain
ready to face loss and a hit on return on capital in case you hold on to the
stock.
Analyst recommendation or so-called ‘gray
market premium’ could only enforce your confirmatory bias and representative
bias.
Subscribing on borrowed money is another sure
way of burning hands in stock-markets.
SOME SUGGESTIONS:
If you like some company then you can wait for
its listig. After listing let the stock price stabilize and excesses ease out.
Let the emotional euphoria fade and cool down.
If still the stock price is available at high
valuation such as it could hit your long-term return then wait for bear market.
You will definitely get your preferred price of acquisition.
HISTORICAL DATE:
An analysis of past data of IPOs suggest that
few IPOs have been able to give good long-term returns and in some case
outperform the markets.
In most IPOs investors have taken a hit on
long-term return of their capital. We don’t say that all IPOs are bad. At the
same time maintain that investors should avoid most of the IPOs for secondary market.