I know most respected value investors warn against investing in IPOs. I have personally followed this advice and never invested in an ipo, since as many renowned investors have told repeatedly, the base rate for returns when investing in IPOs is pretty bad. But one thing I noticed is that most studies compare the listing price with the price one or three years after listing. Since most people invest in IPOs for listing day gains, it would be more interesting to find the base rate for listing day gains.
Prof. Sanjay Bakshi, in a class note on “Keeping you out of trouble in the stock market” gave the following reason for not investing (rather speculating) in IPOs
“The supply of greater fools is not infinite.
Moreover it contracts very quickly and unpredictably.”
But could the supply of greater fools contract within a day especially if the IPO was oversubscribed many times over.
The strategy I have in mind is the following-
- Only invest in an IPO which has generated huge interest.
- Sell on listing day and don’t wait for higher prices.
Would like to know the weaknesses of the above approach and also if someone could point me to a source for getting the base rate of listing day gains.
Since I am trying to start a discussion for the first time, please excuse me if this violates valuepickr guidelines or is not upto the required standard.