IPO BOOM – HOPEFULLY NOT ON THE FACE!!

The serpentine queue is only getting longer in the IPO market; all masks are off and the rush is maddening.

Traders are spoilt for choice – should they day trade and play in the secondary market or should they put money in the bevy of IPOs – four opened this week and all are looking for listing gains.

That’s what the IPO market has become all about – listing gains. Majority issues are attracting people only for quick gains, with little or no attention being paid to fundamentals. Though it is mentioned time and again that one should “Please read the offer document carefully before investing” it is very unlikely that 90% of those investing in the IPOs are going through the 400-500 pages IPO document. SEBI has done its bit by putting forth stringent disclosure norms but how many of us read it?

What we are also seeing is that the yuppie new breed of investors, the millennials, many of them have become stock market punters and they take FOMO (Fear of Missing Out) pretty seriously – if something is advertised and splashed all around town, they definitely need a piece of that action. This new crop of investors want to sound intelligent and smart and they feel putting money in the IPOs gives them those bragging rights.

So, buyers beware. The IPOs markets are enticing but remember that the new issues are there for the benefit of the sellers and not the buyers. It is the sellers who have chosen the time and the price – not you. That in itself does not make much investment sense, does it?  

Whether you read the offer documents or not, read these few pointers:

*IPOs are not an opportunity to “get in at lower prices.” The prices are fixed by insiders who have taken a piece of the pie at much lower prices; when you get in, its an opportunity for them to cash-out.

*Rarely will you come across an IPO which is an Infosys or an HDFC Bank in the making. Today, all IPOs are first priced and then the promoters and the bankers work backwards to justify the price.

*Don’t fall into the hype and charm trap around the IPO- before and during, you will get bombarded with all things good and shiny about the company. That’s how goods are sold, isn’t it? Just keep in mind that those selling the IPOs are basically salesmen and its up to you to see through the shine and glamour, see what the company is really about.

*Never, ever go plunging into a IPO just because it is an IPO – apply only if you are convinced about its fundamentals and it makes good investment sense.

*We are not saying that not every IPO is bad but the truth about every IPO is that the base rate of investing in an IPO is never stacked in your favor.

Benjamin Graham, mentor of Warren Buffett, wrote in Chapter 6 of The Intelligent Investor –

“Our one recommendation is that all investors should be wary of new issues—which means, simply, that these should be subjected to careful examination and unusually severe tests before they are purchased. There are two reasons for this double caveat. The first is that new issues [IPO] have special salesmanship behind them, which calls therefore for a special degree of sales resistance. The second is that most new issues are sold under “favorable market conditions”—which means favorable for the seller and consequently less favorable for the buyer.”

Get the message?

PS: Read our IPO Analysis section and thats as good as reading the DRHP.