Bull Market IPO = Insanely Priced Offering

The year 2017 saw a spate of IPOs hitting the markets here in India. In fact, the number of IPOs that hit the Indian markets in 2017 was unprecedented. For those of you not in the know, an IPO or Initial Public Offering is a situation where a company raises money from the public in the form of an equity stock offering for the very first time. Why then have I called a bull market IPO an Insanely Priced Offering? Read on to find out.

Initial Public Offerings are usually in vogue with investors because they feel it is the cheapest price at which they can buy the stock, especially if the company coming out with the stock offering has promising future prospects, and enjoy all the initial gains on the day of listing before watching it grow into a behemoth. This sentiment is further enhanced during a bull market, which is a stock market phase characterised by strong economic fundamentals and robust economic recovery. Therefore, given this rosey background, investors are all the more enthused when it comes to investing in IPOs and given the fact that global equities are going through a structural and long term bull run right now, it seemingly gives investors all the more reason to celebrate investing in IPOs.

But as picture perfect as all of this may seem, there is a deadly and dangerous dark side to investing in IPOs in bull markets which almost always goes under the radar. Firstly, understand this. When there is a rat race between investors vying for the stock of the latest hot companies on the block, there is an even bigger rat race between the promoters of these companies who look to try and literally extort as much money as they can from the investors looking to be a part of the IPO.Most IPOs in bull markets are fuelled by the greed of the promoters and not the needs of the promoters. Just take a minute to look at it from a promoters perspective. As a promoter coming out with an IPO, I would be raising the money I need from the public at large and not from my own pocket.

When such is the case, why would I bother about what a fair price to float my offer to the public would be, when I know that people out there would readily be willing to pay almost any price for the stock, provided they are sold a promising story? So, I would naturally cook up an incredibly impressive story, sell it hard to the investing public, put an insane price on the offering, before watching the innocent investing public lap up the offering with voracious appetites. Moreover, once the money has been raised, the investing public has no way to clearly find out how the money they have given me is being used. So I can just as well say that I plan to use the money for further expansion, use a fraction of the amount raised for the advertised purpose, just to serve as a smokescreen and pocket the lion’s share of the proceeds myself. And you know what the best part is? There is more than a likely chance that my facade never gets exposed.

Now, I am not saying that every company that comes out with an IPO has a bad promoter or group of promoters with a well cooked story. Some companies do have genuine promoters with genuinely great stories, but even then, sometimes their stock offerings are exorbitantly priced relative to the underlying value of the businesses. It is never a good idea to overpay for a stock, no matter how good the underlying business is. Think of it this way, you may be buying the latest Ferrari model on the block but that doesn’t mean you pay a price worth two Ferrari cars for it. Most IPOs are priced at 3-10 times the value of the underlying business on average, and sometimes even higher.

Most importantly, most IPOs don’t work out as expected. If you bought the Maruti Suzuki IPO in 2003 at 125 rupees a share, congratulations, you’re close to making 90 times your money with the stock at 8750. If on the other hand, you had bought the Reliance Power IPO for 450 rupees a share in 2008, I can only hope you aren’t holding on to it even now with the stock at 35 rupees a share. And this is the story of most IPOs. For a given set of 10 IPOs you may find one or two sucesses, with eight or nine being average performers or complete failures. And the worst part about these IPOs is that they see the worst possible degree of price erosion during tough times, which sees the price erode by 50-75% on average from the high point, or even worse.

So then, what is the best possible way to participate in IPOs? I would prescribe two ways to do so. First, you have the option of finding those companies which come out with IPOs during bull markets and have the strongest business fundamentals. Then, wait for the next bear market cycle, when prices erode heavily thanks to the tough times and negative sentiment around. At this point it is relatively safe to buy these businesses, because you would be buying it at the peak of the bad news, and at a price point that is closer to their intrinsic values.

If this is not your cup of tea, you can look at buying IPOs which are floated at the bottom of a bear market. This is because, in such a scenario, the IPOs would be fuelled by the genuine need of the promoters and not their greed. Also IPOs at the bottom of a bear market are a sign of an impending cyclical upturn for the stock markets and the economy as a whole, therefore making investing in IPOs in such a scenario a little bit safer. Hope this piece helps you understand IPOs more holistically, thereby allowing you to plan your next IPO investments better, ultimately helping you achieve market beating returns.


During an IPO, the company pays an Investment Banker to “Value” their company. Thinking logically, why would a company spend Millions just for a banker to tell them what their intrinsic Value is? Indeed, IPOs are not a Value game, they are a Pricing game. Regardless of whether an IPO comes up during a bull market or a bear market, they are bound to be overpriced (Agreed, during a bull market, excessively overpriced). There is always the case of the Investment Banker missing something about the company, that could dent its IPO Price, in which case buying in to the IPO would make sense, but it’s very rare.

For example, I regularly follow Prof. Aswath Damodaran’s valuations. He values a lot of IPOs too. I’ve never seen one, not a single IPO, being below his Valuation. And he’s one of the strongest authorities on Valuation in the world.


I’m in complete agreement. The objective of most promoters during fund raising in a bull market is to exploit subscribers of the issue. And, investors lured by the vivid narrative woven by the company are entrapped.
It makes sense to commit an error of omission rather than one of commission. Exercising restraint while investing in IPOs, especially, in a bull market could go a long way in ensuring decent returns.
The pertinent question is- What’s the fair value?
We have experts like Professor Damodaran to enlighten us.

In most non financial markets, there’s negotiation, bargaining between buyers and sellers. This process more often than not leads to discovery of the fair price.
In an IPO, in a bull market, the price is dictated to potential retail investors. We have little power to bargain. We will be fleeced.
Hence, it’s crucial to exercise caution. Being suspicious, especially in investing will serve us well.

If you have the list of all IPOs that came up during 2003 to 2008 and how the prices of those companies are faring now as compared to their IPO price, that may substantiate your opinion on bull market IPOs.

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@dineshssairam Yes, you are absolutely right in saying that companies employ investment bankers to value the company for the sake of an IPO and in saying that all IPOs, including those floated in bear markets, are often overvalued. But I have a few reasons for saying that investing in bear market IPOs is a better option. First, during a bear market, promoters and investment bankers would subconsciously be aware that they cannot price the IPO very highly because of the risk of the issue not being fully subscribed. Underwriters too may be unwilling to underwrite a large portion of a highly priced issue during a bear market. Because of all this, the IPO, even if a little highly priced, will be closer to fair value.

Secondly, during a bull market, most companies tend to enjoy substantial listing gains regardless of the underlying business fundamentals. So, the stock of a company with weak fundamentals may also trade at exorbitant valuations, thus killing the margin of safety. The story is exactly the opposite during a bear market. Most companies may incur heavy listing losses and stocks of fundamentally strong companies may also trade at undeserved low valuations which are closer to the intrinsic value of the company, thus creating a margin of safety, or at least, a slightly more realistic illusion of one, making it much safer to invest in the IPOs of such companies during a bear market.

Thirdly, during a bull market, most, if not all of the good news and strong future performance is built into today’s price. Therefore, the future performance of the company has to be as strong as expected, if not stronger, and the flow of good news surrounding the company has to last. Anything less and the stock may take a nose dive. Contrast this with a bear market scenario, where loads of good news and strong performance in real terms may not be enough to push valuations up north. This is the best possible scenario for an investor, because once the markets recover and the value of the strong performance shines through, it allows the stock to deliver market beating returns.

Hope you find this explanation helpful.