Jan

4

A study from Birinyi shows that IPO's made 20% last year, and it supports my point that all these IPO's in hard times must show an expected a priori return of 40% a year compounded for 5 years to get made these days, and all risky assets must be priced off of this benchmark. I claim that in 2008 for an IPO to be made, the underwriters would have had to tell the company people, that their investors need an a priori return of 80% a year, and IPO's would have been priced accordingly.

Kim Zussman shares: 

Check out the latest update to the famous academic study of IPOs by Prof. Jay Riiter of the University of Florida. [34 page PDF].  

Rocky Humbert replies:

Thanks Kim, perfect…. actually a bit more dramatic than my foggy memory recalled.

See Page 24: Average 3 year buy&hold over 28 year history returns show -19.8% market-adjusted returns; and -7.1% style-adjusted returns. Additionally, Figure 5 (page 33) shows that the average first day returns in 2008-2010 were in line with previous (non-bubble) years.

Perhaps Vic can take a few minutes respite from skewering the Yale professor to elaborate on his comment in light of these numbers… ?

There is an excellent bloomberg function called IPO <go> which allows one to analyze historical IPO performance by region, industry, time frame etc. A quick look shows results suggestive that (in general) buying every IPO at the first public trade price and holding for five years will, (over time) under perform the S&P500. (SEC rules bar Hedge Fund managers from participating in IPO'S until they start trading publicly.)

Bloomberg subscribers can run their own numbers and adjust for the many variables.This is consistent with some studies I recall (?kim?) that shorting EVERY IPO and hedging with futures is a winning strategy.

Mr. Albert writes: 

For me it's first pass kind of thing.

I know from experience that I under perform the dart throwing monkeys on a stock picking basis. And although I can classify stocks in kind of a factor model way, and say this is growth, this is value and if I had done this then this, in practice, I cannot tell when to switch regimes etc.

I have no a priori way of screening IPO's to test if they go up or down and if I shorted them when the underwriters can lend etc and so I wonder about all of them first, then I may try to 'curve fit'.

But then again, I'm not very successful and perhaps this is an illustration of why that is.

Gary Rogan adds:

From my experience, if you restrict yourself to the few ones that have a significant operating history and "good" (cheap in the value sense) financials, and low debt, you will invariably make money. Could take days, could take a couple of years. Many of these are mispriced spinoffs, that seem rare these days but used to be more abundant.

The only one I bought last year, about a month ago, was "BODY', after it has been trading for a few weeks. It wasn't obviously mispriced, but it had a very high sales growth rate for a reasonably priced retailer. It was a scary ride, since it started falling as soon as I bought it, but in strange twist I managed to set an all-time low for it with my last limit buy and then it went up. I sold it way too soon only to watch it soar, but at least I came out ahead. In years past, after I got over tech IPOs in 2000 that pretty much all lost money, I bought maybe 30 of them on the open market over a seven year period and held EVERY SINGLE ONE to the point where it was higher than the price paid. You just have to have patience and a strong stomach, and be extremely selective.

Rocky Humbert retorts: 

Mr. Rogan starts out with a promising value-oriented approach; but then veers off the rails– touting in the worst possible way– that one will "invariably make money."

Whether Mr. Rogan is demonstrating patience or several simultaneous foibles of behavioral finance (prospect theory; loss aversion; status quo bias; gambler's fallacy; money illusion; cognitive framing; mental accounting; price anchoring) is something only his hairdresser knows for sure.

What I know for sure is that IPO's, as a group, underperform the market; and if Mr. Rogan is gifted-enough to buck these odds (and outperform the index) and find gems, he is a gifted stock picker.

Such people really do exist– however, it's really annoying to meet them at cocktail parties– where they invariably say things like "EVERY SINGLE ONE" of their stock picks made money.

Perhaps even more annoying is, while they proclaim their genius and long term investment confidence, they write things like:

" A complete worldwide economic collapse has become unavoidable. There is no way out, there are no realistic scenarios that avoid this outcome. The sooner there is a consensus that playing with shifting debt around is not going to solve the problem, the less dramatic this collapse will be. There may not always be an England" [January 23, 2009. S&P level = 831.95].

One must conclude that Mr. Rogan doesn't like the English IPO market. Hmmm. 


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