Buy OPOs, not IPOs

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From a Forbes article titled 8 Investment Rules That Have Stood the Test of Time published in Dec, 1999.

That is, buy old public offerings - not new ones. The problem with initial public offerings is that you’re buying what someone is trying too hard to sell. That should make you suspicious. Says Schloss: “The underwriters want commissions. The seller knows what his company is worth and won’t sell unless he’s getting more.” That is a bit of an overstatement; nowadays technology firms allow under-writers to deliberately underprice their shares so that the shares will pop up on the first day of trading. But note that you usually can’t participate in the fist-day runup unless you are a favored customer of the broker; and note, too, that firms leaving a little money on the table with their initial offerings are often just warming up to much larger share issues, in either secondary stock issues or the use of shares in acquisition sprees.

Graham: “Somewhere in the middle of the bull market the first common stock flotations make their appearance. These are priced not unattractively, and some large profits are made by the buyers of the early issues. As the market rise continues, this brand of financing grows more frequent; the quality of the companies becomes steadily poorer; the price asked, and obtained, verge on the exorbitant… For every dollar you make in this way you will be lucky if you end up losing only two. Some of these issues may prove excellent buys – a few years later, when nobody wants them and they can be had for a small fraction their true worth.”

Very relevant for the present frothy Indian IPO market.

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