Invest in IPOs— Intrinsically Prudent Offers—to make money

2019 is a crucial year for the primary markets across the globe.

Some high-profile startups are planning to go public this year including the likes of Airbnb, Uber, Robinhood, Cloudflare and Pinterest, among others.

When companies go public in high-octane listing ceremonies, the excitement of investors goes through the roof.

Some of these IPOs (Initial Public Offerings) may attract mega market frenzy.

But do you know…

A few of them are yet to see their first dollar of profit, yet on listing they will be billion dollar enterprises.

Isn’t it ironical?

Markets go through such phases every so often.

During the era of the dotcom boom, any start-up with the word technology in its name was able to raise millions of dollars in the world’s largest economy.

Similarly, in 2007, any company engaged in infrastructure development could command jaw-dropping valuations in India. Do you remember how some power companies completely drained investors’ pockets?

If you get hooked to betting on IPOs during such phases, you might end up locking up your capital for years to come.

Who’s to blame?

  • Market conditions
  • Irrational exuberance (Greed)
  • Aggressive IPO pricing

We believe it’s a combination of all!

While nothing is wrong in making quick listing gains, investing in IPOs blindly certainly is! Investing in a company on the day of its listing without paying any heed to its fundamentals is equally bad.

 

Time to do a reality check…

Markets in India were on a firm footing for the past few years. As a result, a number of Indian businesses launched IPOs.  Those who got carried away by the upbeat market conditions and invested in IPOs must be going through a rough patch now.

IPO report card

For the purpose of calculation of returns, data as on December 31, 2018 has been considered
(Source: ACE Equity, Ventura Securities)

 

Some lessons to learn

Over last three years, nearly 246 companies went public in India. Of these, only 132 are trading above their issue price and just 120 above their listing price. Out of the loss making ones, 43 are down in excess of 50%.

That said, 41 companies have generated over 100% returns on their issue price.

This goes to show that, if you bet on the right IPOs, they reward you handsomely. Should you invest in the wrong ones, you would end up burning your fingers.

So, while investing in IPOs…

  • If you are investing in an IPO to make quick gains, pricing of the IPO and market conditions are the two most important factors to watch out for. Company fundamentals might be good but in the absence of these two factors, you are unlikely to make listing gains.
  • If you want to hold onto them for the long term, valuations and company fundamentals will be the two most crucial factors. In other words, avoid investing in aggressively priced IPOs at all costs, whether you are a trader or a long term investor.

The mantra is to avoid Initial Pushy Offers and invest in Intrinsically Prudent Offers.

 

One Comment Add yours

  1. TAPAN KUMAR BOSE says:

    Very Encouraging

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