Wednesday, April 07, 2010

Dubai or not Dubai - that is the question

Seems like the IPO market is hotting up. I've seen a lot of people asking whether to subscribe to the IPO and how many lots to bid. Personally, I hate to bid for IPO. Why?

1. IPO stands for It's Probably Overpriced. Mw told me this before, I agree.

2. You do not know how many lots you are going to get, hence people will usually bid more lots than they really want. It's a catch-22 situation - if you get it, it means that people do not want it. If you don't get it, it means that the IPO is hot.

3. Money will get tied up for some time while the ballot is taking place. Unsuccessful bids will have your money refunded after another period of time. Of course, there will be a placement fee which is not refunded. I don't like getting my money tied up like this.

4. Based on experiences, the price will fall after the first day of trading. Hey, if you can think that you're going to make a profit by selling on the first day of its trading, so will others.

It's the last point that I'll be looking into with more details. I want to find out if my experiences is grounded in reality, or I'm just suffering from schadenfreude. Let's take a look at some of the IPOs listed in the last two years:

Do take note that there could be errors in my interpretation of what is considered bottom. The data is gathered with the best of what my tired eyes provided me.

Based on the simple assumptions, I proceed to make some daring but hasty conclusions. Here's what I found out:

1. Out of 29 IPO samples taken since last year, 26 of them had the highest price of its first trading day above its IPO price. Only 2 of them had their highest price below the IPO price on the first trading day, and 2 of them with the highest price being the same as IPO price.

It would seem that betting on IPO offers quite a good bet, regardless of fundamental. The probability of winning seems rather good (if you sell at the high). I'm thinking that even if you didn't sell at the high, you would have made a pretty good quick profit. That statement remains untested.

2. Of the 26 which had a high above IPO price, they have an average gain of 35% gain on its debut day. That is if you managed to sell at the highest point. Of the 2 that had their highest price below IPO price, the average loss was 2.5%.

Well, not only is there a high chance of a winning trade, the rewards of a winning trade is also much more than the loss of a losing trade.

3. Based on my subjective view of a bottom, only 9 out of 29 samples (I exclude TTJ because it's too young) had a closing price at the bottom being higher than the IPO price. 1 remained unchanged, so that leaves 19 samples with the closing price at the bottom being lower than the IPO price.

This means that if you're an investor looking to get a good yield on low price, you might as well wait instead of punting on the IPO. You have a good chance to get a lower price later.

4. Out of those 19 samples that had their closing price at the bottom being lower than the IPO price, the average drop in price is 15% below the IPO price. Out of those 9 samples, the closing price at the bottom rose 22%, on average, above the IPO price.

While it seems that a quickie is quite a good bet in the IPO market, it's not so good if you're planning to invest for a longer term. If you're looking to invest, I think it's better to wait for the price to drop below IPO price. There are times when your plan to get a lower price than the IPO price may fail...but I think you stand a good chance.

5. Out of those 19 samples that had their closing price at the bottom being lower than the IPO price, the average waiting time to wait for a bottom is 33 days.

However, do take note that this period of time suffers from a huge variation, possibly depending on market sentiment. From a visual glance, I noticed that in 2009, the wait for a bottom is longer. The few IPOs that we had this year...their wait is much shorter. Around 2-3 weeks only.

I think the key takeaway is this:

1. If you're looking to punt for a quickie, go ahead.

2. If you're looking to invest, wait a while for a lower price.

As for me, I don't think I have the luck to get a successful bid. Don't think I'll be going for any IPOs. This is not the kind of money I make and I understand that. Let others take the thrill.


Anonymous said...

The public is always at a disadvantage when it comes to IPO. The company puts up the best show ever i.e. high profits, glowing Balance Sheet etc. so as to get the best PE ratio. Usually, those nos. are not so easily achieved after the IPO. Of course there are exceptions. But it is not the norm. So caveat emptor.

dream said...

this girl is too young...

la papillion said...

Hi anonymous,

Hmm, I do agree. I was bluffed the glowing reports of a relatively young IPO stock...

Oh well.

Musicwhiz said...

IPOs are usually over-priced, over-promoted and the risks are under-stated.

I've learnt to invest in companies which are already listed and which offer a better value proposition and track record....

Unknown said...


Your analyse is all correct.

When playing IPO, it will be best to sell on the first few days.

Another fruit for your thought.

My observation is that IPOs during the bear market is performs the worse. So in bear market situation, avoid playing IPOs.


la papillion said...

Hi mw,

Haha, I thought so too :) I didn't put it in the article, but investors should look elsewhere for their pot of gold. IPO isn't really a good starting place.

la papillion said...

Hi Jeng,

Long time no see :)

I just wanted to test if my experience is really true by comparing some data. I also observed the same thing as what you observed. In fact, IPO is really rare in bear markets in the first place, haha :)

PanzerGrenadier said...


My own take on IPOs is to do a quick stag, i.e. go tikam at ATM and sell on first day.

Too much GREED and FEAR on debut and also possibility of institutionals selling to ill-informed retail punters. :-P

Be well and prosper.

la papillion said...

Hi PG,

I would do the same too (except I'll apply online, haha). Let the bugger prove itself before you commit your capital.

Collin said...

Let this ease your eye strain in future.

la papillion said...

Hi collin,

Thanks for your feedback. I did looked at that before, but since they do not have the information that I want, I have to do it myself. Might as well...

Thanks again :)

Createwealth8888 said...

I also instruct my brokers don't bother me with IPO