The IPO Fever
It has been quite a sight lately to see everyone so excited about almost all the IPOs (Initial Public Offerings), one after the other. But when not allotted, participants generally feel disheartened as if they had bought a lottery ticket that didn't win.
General observation - Mostly an IPO is not just applied in one account. There is one person in the family who ensures IPOs are applied in all the accounts. In some places, I have seen people compare the success rate 0/4 or 2/6 representing the number of allotments over applications. I would have been happy about this until I realised that most of the times they don't even know what the company has to offer.
The IPO fever it is, when applicants don't seem to be bothered about anything else except the allotment. Using this sentiment, most businesses are raising capital and shredding equity at a price that I would never pay. The worst is the long queue of the Good, the Bad, and the Ugly businesses (qualitatively) all lined up at obnoxious valuations. Most participants fail to understand that a business, no matter how good, can turn into a bad investment decision beyond a price.
For those who do, let us try to understand why it's not good for the markets:
1) The money flows out of the secondary markets into the primary markets. Probably never to return.
2) Most of the applicants in the IPO fever are the ones seeking quick listing gains and have no basic intent or interest to actually invest in the business.
3) Business which otherwise would not get the capital due to quality concerns, also sail through– infusing junk into the system, which later results in wealth erosion for the remaining investors.
4) People who didn't get allotment, out of FOMO enter an already inflated IPO after blockbuster listing at a further disastrous valuation. Sometimes only to get stuck at a price they will never see again.
So! How to decide what's a fair IPO and whats not?
It's simple- Evaluate a stock like a business irrespective of the IPO event. If you would not buy the business otherwise, don't buy its IPO either.
Luckily, my rule book doesn't let me invest less than 3% of my investable capital in any business. Hence I don't get to participate in IPOs anyhow. However, if a business is great I would either buy it pre-listing or post-listing any way...