IPO investing - Can it be a way to play the bull market

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.

Hi Sarthak,

your opinion exactly matches mine. There was a question where the cash component of my portfolio reside. Liquid funds? FD? HDFC twins? or just savings? Finally I decided to divide the cash component for all families demat accounts and apply for all good rated IPO’s in bull market.

There is a certain advantage to this.

  • Your money does not remain blocked for many days.
  • At anytime in oversubscribed IPO, you get only one lot gets allotted so downside is still limited.
  • Returns in bull market are higher than any fixed income scheme.

Still trying to find. Views invited. (Even in 2008 market crash reliance power did provide chance to go out at purchase price briefly).

I also have a thought process for applying each and every IPO but that is something yet not thought through. Will only do it if there is confirmation on this bull market ie. the earnings start to catch up (whichever quarter it is).

Hi Sarthak,

This is good strategy to practice especially in bull market. In fact, I myself practice this.

Apply for good IPO (which has catch fancy of investors) and sell allotted shares on listing day irrespective of loss (less chance especially in bull market) or profit (high chance especially in bull market).