IPO Investing

Initial Public Issues (IPO) are the first sales of stocks by the company to the general public. The key reasons for IPO are- Need of money for expansion, paying down debt, get reasonably inexpensive promotions ( by getting coverage by media and stock analysts) and as an exit route for insiders, angel investors and Venture capitalists.

There is a key difference in mindset of 'growth investors' and 'value investors' while thinking about IPOs.
Value Investors believe that the last reason is the key reason for IPOs. And that's precisely the reason we see more IPOs in bull markets and very few in bear markets. And they prefer to avoid IPOs reasoning Its Probably Overpriced!!
While 'growth investors' believe New is the fancy and they try to catch the fancy and make money in the process.

So who's right?

If we look at BSE-IPO Index since inception in May 2004 and compares it with BSE- Sensex till now, we can clearly see that IPO Index has been under performing Sensex.
So, Value Investors seems to be making a good point.

Better to avoid IPOs!!!!

King's Experiment with Truth

Vijay 'King of Good Times' Mallya promoted Kingfisher Airlines seems to be heading the headlines for all the wrong reasons in recent news items.
Accumulated Losses.... Huge Debts..... and Bankruptcy.

What is the reason?
No its not Deepika. (There is a joke going on facebook- Deepika dated Yuvraj and he lost his form, she dated Ranbir and he did some crappy movies and then she dated Siddharth mallya- well company hi duba di bechare ki)

The actual reason was highlighted by Mr. Warren Buffett some 28 years back (in his 1983 letter to shareholders). Here is the relevant portion-
"

Businesses in industries with both substantial over-capacity and a commodity product (undifferentiated in any customer-important way by factors such as performance, appearance, service support, etc.) are prime candidates for profit troubles. These may be escaped, true, if prices or costs are administered in some manner and thereby insulated at least partially from normal market forces. This administration can be carried out (a) legally through government intervention, (b) illegally through collusion, or (c) “extra legally”

through OPEC-style foreign cartelization.
If, however, costs and prices are determined by full-bore competition, there is more than ample capacity, and the buyer cares little about whose product or distribution services he uses, industry economics are almost certain to be unexciting. They may well be disastrous."

Here is another one which you should have listened to, Mr. Mallya (From 1980 Letter)-

When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, generally, it is the reputation of the business that remains intact.

Now what?
Either government bailout or more equity or bankruptcy. Lets see what happens. 

Just wishing that I am not the one to pay the tuition fees for your education!!! 

Reversion to the Mean

One of the most powerful psychology models is "Reversion to the Mean."

See the recently concluded Australia- South Africa test as a superb example of this.
End of Day 1- Aus- 214/8.
Day 2- Aus- 284 all out. ( M. Clarke- 151)
            S.A- 96 all out.
            Aus- 47 all out ( Recovered from 21/9)
So, S.A needed 236 to win the match which looked huge at that stage.
Not many would have put money on S.A to chase this down.
A trend of low scores was established on Day 2, and everyone (most) would have put their money on this trend to continue.
I, in my office, tried to find mispriced bets for mean reversion to occur. Could not find in this case.

But there is always a place to turn to, to find mispriced bets where reversion to the mean is not expected.
Trends are considered to be the destiny.
See the trend below-

Ask yourself, can this trend continue for ever?
If something can't continue forever, it ll surely end one day.