Tuesday, 30 March 2010

Shouldn't retail investors be wary of IPOs?

Legendary investor Warren Buffett is wary of IPOs. Shouldn’t retail investors walk his path? 

It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller to a less-knowledgeable buyer,” Buffett reportedly said on IPOs. 


But why did majority of the IPOs fail to deliver? The usual answer from the companies and bankers will be “that’s the way market is”.Although there’s no single reason, a dominant one is the pricing as sellers try to get the maximum, which, at times may be even higher than their traded peers by sugar-coating prospects. Broadly speaking, the companies that debuted with high valuations compared to their listed peers failed miserably. 


Most of the IPOs failed to deliver simply because they were priced too aggressively.  Besides the company specific reasons, the common factor among them was their high price to earnings (P/E) multiple that they were asking. 

Why I usually avoid IPOs

No comments: