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?
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!!
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 applies | Market don't applies | Market applies | Market don't applies | |||
| I apply | Negligible GAIN | Huge GAIN | I apply | Negligible PAIN | Huge PAIN | |
| I don’t apply | Look A Bit STUPID | Can buy after listing | I don’t apply | SAFE | SAFE | |
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!!
looks like a gud buy now!!!
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