Why Investing in IPO is a Disaster for a LongTerm Investor.

November 5, 2020

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Strategic Alpha

  1. Business owners have a better hand over investors in terms of pricing and thus wealth creation opportunity.
    • Owners who own the business will bring the IPO’s only during good times so that they will get a better price for their Assets. Nobody wants to sell their assets at lower prices. There is no value left on the table for Long term investors. That’s the reason why most IPOs are launched only during Bullish Markets.
    • Buffet Says:- An IPO is like a negotiated transaction – the seller chooses when to come public – and it’s unlikely to be a time that’s favorable to you. So, by scanning 100 IPOs, you’re way less likely to find anything interesting than scanning an average group of 100 stocks
    • Mr. Parag Parikh in his book Value Investing and behavioral finance wrote:-It’s safe to conclude that IPOs, which seem like a good investment vehicle is, in reality, not so. In fact, an IPO is a product that is against investor interest, as it is mostly offered to investors when they are willing to pay a higher and outrageous valuation in boom times.
      He also gave a Lecture at Goa institute of management on the psychology of IPO investment. You may like to watch this video. Click Here
      https://www.youtube.com/watch?v=V_cUE61x0H8
  2. No public history.
    • When someone makes an investment decision, one will go in the past and study about business performance and respective stock movements or behavior to decide upon investment decisions. At Least I like to invest in a company that has at least 10 years of public history. In the case of IPO’s, there is hardly any information available in the public domain, which makes it difficult to make a long-term investment decision and have to solely rely upon management’s comments.
  3. Oversubscription Due to Roadshows, Even if Prospects are great about a company.
  • Most IPOs will have a long roadshow before stock listing. This is an advertising campaign during which business representatives try to convince potential investors of the investment attractiveness of their assets. Even if a company has good prospects, due to such advertisements, there is oversubscription which leads to very less chances of getting shares through the IPO route. 
  1. IPOS are Always Expensive
  •  It’s the nature of human beings that, whenever a new thing is launched in the market, they look at it from a good perspective even if there are things already available in markets which are more valuable than newly launched ones. That’s the reason why Apple sells its products which are more or less similar to earlier versions just by labeling it in a new format. People are so obsessed with this new thing. Also, most people assume that in IPOs we get an opportunity to buy at lower prices, as it is an initial offering, however, the reality is, Pre-IPO Investments such as Private Equity and VC investments are real initial offers. IPOs are brought to make a room for the exit for Private Equity Investors with handsome investments at the expense of retail investors subscribing to IPO’s for the Long Term.
  1. IPO’s Underperform Heavily

     Around 69% of Stocks are Below their Listing price even after a decade long from 2010-2020. Around 40% of the stocks have lost 90% of its value. So if someone keeps investing in several IPOs for the Long term, It’s a Sure way to lose money on a consistent basis. To check the stats of all IPOs Listed from the past 1 decade, click here.

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The author of the blog Mr.Suyog Dhavan is a Full-time Investor / Value Trader and Value investing/Trading Mentor. His style of Investing is inspired by Mohnish Pabrai, Peter Lynch, and Porinju Veliath. He is the founder of Strategic Alpha Wealth, A Premier stock market mentorship firm with a mission to touch the lives of 1Lakh people through its mentorship program.

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