Why should I not invest in the Stock Market IPOs?

It is very helpful considering the point that people believe in applying for the following reasons:

  1. Listing gains
  2. Bagging stocks which can be a multibagger in the coming years
  3. Investing in marquee names

Despite the above-stated reasons, it is not a good idea to invest in stocks at the IPO Stage

Let us take an example of a stock listed via IPO Route:

GIC-Re Company Logo

Now let us look at the performance since listing in October-2017

The stock was listed at INR 417 (approx). Today, it is trading at less than half the value (INR 170(approx))

GIC-Re Stock Performance Since Listing in 2017

This is true for other listings like Burger King

The stock at INR 158 (approx) and was higher for next 1–2 days and has almost corrected with brief rise from listing price.

Burger King Stock Performance Since Listing in 2020

This shows that listing gains cannot be the only driver especially for retail investors who are banking on returns for future security.

View of Value Investor:

An insightful article that maps the thoughts of value-investor, Warren Buffet can be helpful:

In my view, you’re way more likely to get incredible bargains in an auction market. It’s just the nature of things…Sometimes there will be IPOs in terrible markets, and they may come very cheap. But by and large, that is not when IPOs come. They come when the seller thinks that the market is ready for them. And they come with an informed seller thinking it’s a pretty good time to go public. And, you know, you’ll make better buys, in my view, in an auction market.” – Warren Buffet

Source: https://finance.yahoo.com/news/warren-buffett-why-ipos-painful-175425210.html

This view is also held by other value investors like Monish Pabrai

Value Investors – Monish Pabrai with his Mentor & Guru – Warren Buffet

Conclusion:

  1. An IPO is meant to give existing investors like the Government, Private Equity, Initial Investors (Venture Capital & Angel Investors) an exit route at a good premium (Offer For Sale – OFS)
  2. Fresh issue of shares for the IPO should be inline with growth estimates, innovation, & operational efficiency
  3. Hype and listing gains cannot be an allure for IPO Subscription

Hope you find this helpful

Do share and subscribe if it has been able to bring clarity with regards to investing

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