Is IPO a sucker game?
Historical evidence suggests it is.
You know you are back in a bull market type scenario when the IPO talk resurfaces. Of late we have been reading about how many new (and old) companies are gearing up to tap the markets for fresh funds. On one hand that is good because it confirms the bull market status! But on the other it is also a sense of caution because poor quality issues suck up liquidity. It is always a fine line between what is good and what is hyped up to look good.
Problem with the IPO area is that somehow it has generated the feeling that it is a good way to invest into the market. This may have been true back in the 70s and 80s when some silly rules made it mandatory for issues to be priced at good discounts and those that recognised it became quite wealthy. The FERA dilution era of late seventies was literally manna from the heavens for new issue investors. I recall many people who were doing this work full time. They even engaged people just to fill in the forms and stand in queues to deposit it in the banks! Once, however, the CCI was abolished and pricing became freer, we went to the other extreme where almost nothing was left on the table for the investor and the promoters took away most of the cream.
A look at the data of the last 10 years shows that in 7 of the 10 years it would not have been possible to make money out of IPOs. That’s a very big chunk of losers and should be an eye opener for those that think that IPOs make money. Some of them do, of course, but a 10-year statistic is not something to be ignored. In the last 7 years even selling on the day of listing is also not really making money, except for some loose change. So, historical evidence is not with the IPO investor. The statistics reveal that whether you sold them on the first day or held them for a year, in either case, making money would have been a very low probability scenario.
Over time, the sizes of the issues have become larger and larger. PSU dilution is going to be a big one in the months ahead and we should get some idea, perhaps, after the budget. There should be some room to benefit there as there is talk that those could be priced at some decent discounts. About the others, one will have to be careful in investing. In any event, it is now time to plan ahead to keep some portion of our money for IPOs as there is likely to be a regular flow. Will Modi Sarkar make it different this time? Time will tell.