Saturday, 25 February 2012

You, Me & IPO

2012 came with some good time for secondary markets. If secondary markets are doing good, primary markets also try to catch the action.... (Envy, Recency Bias, Social Proof)

So should I invest (or speculate) in primary markets i.e IPOs ?

Thinking in terms of probable outcomes should help....
1) IPO is Either Good or Bad... By Good IPO, I mean either good company at fair price or fair company at bargain price. You can get some indication of goodness or badness of a company through IPO grading. But always take that grade with a pinch of salt... (IPO grader gets money from the company he's grading... so Incentive Caused Bias comes into play)

2) Market will either apply or won't apply... Apply means 10-25-50-100 times over-subscription while don't apply means just full subscription or under-subscription.

Knowing this comes my decision... Apply or don't apply?

Good IPO
Bad IPO
Market appliesMarket don't appliesMarket appliesMarket don't applies
I applyNegligible GAINHuge GAINI applyNegligible PAINHuge PAIN
I don’t applyLook A Bit STUPIDCan buy after listingI don’t applySAFESAFE

The above decision process is self-explanatory.
But it deals only with the magnitude... What about probabilities?

There is more probability of market applying to good IPOs and avoiding bad IPOs. So, there is much more chance of landing in green cells in the above shown decision process table...
And what's the probability of the next IPO to be Good?
Not too high either... Why would an informed seller leave too much on the table for an ignorant buyer?
So more probability of being in Table-2 than in Table-1.
So the most probable final outcome is going to be- APPLY- HUGE PAIN; DON'T APPLY- SAFE.

Where is MCX ?
Monopoly (82% market share), presence of economic moat, PE of 17-18 (on 2012 annualised E), high ROCE made it a Good IPO. 5/5 by CRISIL justifies this opinion. So, we end up in Table-1.
So, in all probability, Market had to apply. Market goes all-out & applies more than 25 times the desired quantity.
Result, If I applied- Negligible Gain or If I avoided- Looking a bit Stupid. Though 25 times over-subscription significantly decreases the magnitude of both the possible outcomes.

And by the way, is it a Good IPO?
Its a good company, and should get 25 PEs IMHO. But at normalised E. Due to recent run-up of gold and silver & muted equities, E looks on the higher side to me. If equities do well for 2-3 quarters relative to gold and silver OR something happens to China, Earnings may well correct for MCX.
That will be a good time to enter!! 

Friday, 17 February 2012

Mistakes- (Direct and Vicarious) & Blowing Up

We, human beings, tend to make a hell lot of mistakes in our life time.
So... Is it Ok to make mistakes?
Tried asking this by Google Uncle & found the following answers-

"If you don't make mistakes, you aren't really trying."                                           -Coleman Hawking

"The man who makes no mistakes does not usually make anything. "                    -Edward Phelps
"The greatest mistake you can make in life is to be continually fearing you will make one." -Elbert Hubbard
"If you aren’t making any mistakes, it’s a sure sign you are playing it too safe."     -John Maxwell
These kinda quotes makes me believe its good (even great) to make mistakes.
So, I, hereby, plan to decide to make at least one mistake everyday!!!
How's that for a plan?? Exactly its Idiotic.

So what should we do with mistakes?
I would say our aim should be learn a lot from vicarious mistakes, make less of direct mistakes (and learn from them, if made) and absolutely avoid Blow-ups. 

Let me explain the terms-
Direct Mistakes- These are the mistakes made by us. We should try to minimise them & learn from them because its a painful and time-consuming experience to make these mistakes & you won't go anywhere if you make all the mistakes yourself.

Vicarious Mistakes- These are the mistakes made by others. These should be our maximum source of learning. As Munger puts it- "You don't have to pee on an electric fence to learn not to do it." 
You should read newspapers not to know what's going around but to see a lot of vicarious mistakes made by others. And you should also use your mistakes in one field & learn from them to not make mistakes in other fields.

Blow Up- I don't know who coined this word but it was introduced to me by Taleb. It essentially means making such a huge blunder that you don't get a 2nd chance to rectify your mistake. Once you make it, and that's it, you are gone. Gone forever. No Second chance.
What causes Blow Ups?
Being a lollapalooza outcome, it has to involve a number of factors.....
Bad strategy + Excessive Over-confidence (Excessive Leverage) + Bad- luck = Blow-up
All three are essential for a complete blow-up.

If you can avoid blow-ups (Blow-Ups, and not Blow-Up, because we can blow-up one field of life & can still have a normal life in other fields of life & hence have a chance to blow-up other fields as well) you should do OK in life even if you don't learn anything from vicarious experiences. If you do learn from then as well, you should do super...