Benjamin Graham, the father of value investing, writes in ‘The Intelligent Investor’…
“In every case, investors have burned themselves on IPOs, have stayed away for at least two years, but have always returned for another scalding. For as long as stock markets have existed, investors have gone through this manic-depressive cycle.
“In America’s first great IPO boom back in 1825, a man was said to have been squeezed to death in the stampede of speculators trying to buy shares in the new Bank of Southwark. The wealthiest buyers hired thugs to punch their way to the front of the line. Sure enough, by 1829, stocks had lost roughly 25% of their value.”
Over my 23 years of experience in the stock markets, I have not come across any IPO at least in the past ten years or rather since the Capital Controller of Issues was abolished that has been launched keeping in mind the interest of retail investors. They were all overpriced. There are a plethora of examples, Google, Facebook, Groupon, Reliance Power, Coal India , JSW Energy etc. Every damn broker and expert said Coal India was ‘Gold ‘ India. Few months down the line they were all available cheaper than the offer price. Most of them were launched in the form of ‘legalized looting’ by company promoters and their investment bankers.
I have therefore, come to believe Graham’s definition of IPOs in The Intelligent Investor. He said that intelligent investors should conclude that IPO does not stand only for ‘initial public offering’. More accurately, it is a shorthand for…
- It’s Probably Overpriced, or
- Imaginary Profits Only, or
- Insiders’ Private Opportunity
Therefore, I reiterate, never invest in IPOs, if your friend gets richer by applying in them, let him get richer.