Latepost Facebook: Playing The Ipo Popular Game?
In my final shipping on Facebook, I provided my approximate of value (about $ seventy billion) in addition to concluded that I would non live on a buyer of Facebook shares fifty-fifty if the companionship was valued at unopen to $ seventy billion. H5N1 few of y'all receive got taken me to line of piece of employment for leaving what y'all come across as slowly profits on the table, noting that if I were able to larn Facebook shares at the offering price, that I would live on guaranteed (or unopen to guaranteed) a substantial profit. More generally, in that location is the perception that investing inwards IPOs at the offering cost (and making money on the offering 24-hour interval pop) is a low-risk, high homecoming strategy that tin live on used to augment your portfolio returns. Like most "sure" things inwards investing, this i comes alongside implicit assumptions in addition to costs in addition to is definitely non "sure". Here is my listing of caveats for those considering the "Facebook IPO Pop" strategy.
1. You receive got to live on able to larn the shares at the offering price
Let's tell that when the Facebook IPO does larn "priced", y'all bid to purchase shares at the offering price. One of 2 things volition happen: y'all volition either larn your requested number of shares or y'all volition not, in addition to ironically, it is the onetime that should worry you. If y'all are correct inwards your basic hypothesis, i.e., that IPOs are nether priced, the need for the shares at the offering cost volition plough over the furnish in addition to the investment bankers managing the IPO volition receive got to ration the shares. If the procedure is fair, y'all should larn solely a proportion of the shares y'all asked for, alongside the proportion getting smaller as the shares larn to a greater extent than nether priced. If the procedure is fixed in addition to the investment banks give root dibs to their preferred customers, the proportion y'all get, if y'all are non i of the preferred customers, volition live on fifty-fifty lower. Thus, the solely scenario y'all should dread if y'all are non a preferred client is i where y'all larn your entire allocation filled, because that is an indication that the shares are over priced.
This allocation procedure has ever been the achilles heel of strategies that endeavour to invest across all IPO offerings. You may bid for $100,000 worth of shares of every IPO for the adjacent year, simply y'all volition terminate upward alongside a portfolio that has likewise picayune invested inwards the most nether priced IPOs (since y'all volition larn far fewer shares than y'all requested inwards these) in addition to likewise much inwards the most over priced IPOs (since y'all volition larn all of the shares y'all asked for alongside these).
2. The stock has to popular on the offering date
Once y'all receive got been allotted the shares at the offering price, y'all receive got to promise for a stock cost popular on the offering date. You do receive got history on your side. Looking across all IPOs, in that location is bear witness of an offering 24-hour interval increase inwards stock prices. The figure below graphs out the average "under pricing" across all IPOs, yesteryear year, for US of America stocks:
Note, though, that this homecoming presupposes that y'all tin invest an equal amount inwards each IPO, nether priced or not, simply it is withal impressive. Over the entire 50 twelvemonth fourth dimension period, in that location receive got been solely 4 years (1962, 1973-1975) where the average returns were negative, in addition to in that location are periods, such as the belatedly 1990s, where the average homecoming is unopen to 100% (doubling of cost on the offering date). That is adept intelligence for the "Facebook IPO Pop" strategy.
Before y'all larn likewise excited, though, annotation that the nether pricing is greatest alongside the smallest offerings, as evidenced inwards the graph below:
Given the size of the Facebook offering (even 5% of $100 billion makes this a large offering), this graph should atomic number 82 y'all to lower your expectations of the cost popular on the offering date.
There is also bear witness that this nether pricing is yesteryear design. The IPO pricing cookbook at most investment banks includes a "take 15% off the value" element inwards every pricing recipe, since the positive intelligence stories that accompany the popular are viewed as a sales pitch for hereafter stock issues. The nether pricing also is consistent alongside the incentives for investment banks, who to a greater extent than oft than non guarantee the offering cost to the issuers, in addition to so receive got fare to a greater extent than to lose yesteryear over pricing than from nether pricing.
This IPO nether pricing has been the source of angst for some, who experience that the nether pricing is unfair to the founders/owners of the companionship going public, since they are leaving money on the table, yesteryear offering their shares at a discounted price. That argument, though, becomes less persuasive, when y'all recognize that solely a small-scale portion of the outstanding shares is to a greater extent than oft than non offered on the offering date. The discounted cost on these shares operates the same agency a loss leader operates inwards a retail store: it is designed to whet your appetite in addition to larn y'all to purchase more. You promise that those who purchase these shares (and experience adept nigh the profits they make) volition live on dorsum inwards half dozen months or a twelvemonth to purchase to a greater extent than shares inwards the company. So, if y'all are feeling distressing for pathetic Mark Zuckerberg on the offering date, don't worry! There are enough to a greater extent than shares inwards Facebook that volition live on hitting the marketplace inwards hereafter years.
From an investor's perspective, what tin travel wrong? Note that the average is across all IPOs (and is skewed yesteryear the smallest IPOs) in addition to that a subset of IPOs come across a drib inwards cost on the offering date. These are of class the IPOs where y'all got all of the shares y'all asked for. If y'all are non a preferred customer, your odds of making money on IPOs decrease. Even the preferred customers are offered a mixed bag. Not solely does their preference stalk from the large amounts that they pay the investment banks for other services rendered, simply they are expected to live on "good" investors. In other words, if they flip the stock presently afterwards the offering, it may endanger their preferred condition on hereafter IPOs. More on that inwards the adjacent section!
3. You receive got to fourth dimension your leave of absence well
Assume straight off that the root 2 pieces of the puzzle receive got fallen into place. You receive got been allotted shares inwards the Facebook IPO in addition to the stock has popped 15% on the offering date. Should y'all sell straight off or should y'all wait? That eternal question has particular resonance alongside IPOs, because the gains on the offering engagement tin live on fleeting. Remember that Groupon's 20% fountain on the offering engagement is straight off all gone!
Studies that rail the post-offering functioning of IPOs propose that they do are non adept investments inwards the aftermath. In the figure below, nosotros compare the returns inwards the root 5 years afterwards an initial populace offering, alongside the returns on non-IPO stocks.
The returns on IPOs lag the returns on other stocks inwards the marketplace in addition to do in addition to so much to a greater extent than inwards the root few years afterwards the offering. Thus, if buying at the offering cost requires y'all to handle the stock for a twelvemonth or 2 (which may live on required of y'all as a preferred customer), y'all may non live on getting a peachy deal.
In fact, my valuation of Facebook is predicated on the supposition that y'all may desire to handle Facebook for to a greater extent than than a 24-hour interval inwards your portfolio. If y'all do, in i lawsuit the buzz fades in addition to the IPO paparazzi leave, the companionship volition live on judged increasingly yesteryear how it performs relative to expectations. If cost in addition to value are on a collision course, value ever wins out.
4. You are playing a sector in addition to momentum game, fifty-fifty if y'all don't desire to...
If y'all bid for shares inwards the Facebook IPO offering, I do believe that the odds may live on inwards your favor for winning the game, if y'all define winning as getting the shares at the offering cost in addition to flipping them real chop-chop afterwards the IPO. Much as I am tempted to bring together you, I am afraid I volition sit down out that game in addition to non because of whatsoever noble impulses (such as wanting to live on a long term investor or non speculating).
The IPO game is a subset of the momentum game, on which I receive got posted before. It is a game that produces large winners simply momentum ever turns, in addition to when it does, it creates large losers. To come across the link, annotation that IPOs travel through hot in addition to mutual frigidness phases, alongside years inwards which y'all receive got hundreds of IPOs in addition to years inwards which y'all receive got a few dozen.
In addition, also annotation that IPOs inwards whatsoever given twelvemonth tend to live on concentrated inwards a few sectors in addition to those sectors to a greater extent than oft than non receive got momentum on their side (dot com stocks inwards the 1990s, social media companies today). Thus, the success of IPOs inwards a sector is closely tied to whether the sector maintains it "hot" status.
One worrisome aspect of IPOs is that they may operate as canaries inwards the coal mine inwards signaling momentum shifts; the loss of enthusiasm for point com IPOs (and the withdrawals of some) coincided alongside the epic collapse of the sector that year. The momentum driving social media companies volition terminate i 24-hour interval in addition to it may real good live on the 24-hour interval that Facebook goes public. "Unlikely", y'all say, in addition to I agree, simply the tough part of beingness a lemming is that y'all never know where the cliff is coming. Of course, y'all may live on able to sense momentum alter much amend than I, inwards which illustration y'all should live on able to play the game successfully.
Bottom line
H5N1 strategy of investing inwards IPOs at the offering cost looks much amend on newspaper than it plant inwards practice. All of the academic studies that exhibit the average underpricing are implicitly based upon the supposition that y'all tin create an as weighted portfolio of all IPOs, when inwards fact, a non-discriminating investor volition terminate upward will live on alongside likewise much invested inwards all of the worst IPOs.
The strategy tin live on made to travel yesteryear an investor who uses analysis (valuation or information) to invest solely inwards IPOs that are most probable to live on nether priced in addition to follows through alongside timely selling to capture profits afterwards the offering. Even for that investor, it is a supplementary strategy since in that location volition extended periods where in that location are no or real few IPOs inwards the market.
So, if y'all are bidding for those Facebook shares, adept luck. I promise y'all larn solely a fraction of the shares y'all enquire for (see part 1 for why), that the stock cost pops on the offering date, that y'all larn out earlier the you-know-what hits the fan. in addition to that y'all are non the unfortunate individual who helps band inwards the terminate of the social media circus.
1. You receive got to live on able to larn the shares at the offering price
Let's tell that when the Facebook IPO does larn "priced", y'all bid to purchase shares at the offering price. One of 2 things volition happen: y'all volition either larn your requested number of shares or y'all volition not, in addition to ironically, it is the onetime that should worry you. If y'all are correct inwards your basic hypothesis, i.e., that IPOs are nether priced, the need for the shares at the offering cost volition plough over the furnish in addition to the investment bankers managing the IPO volition receive got to ration the shares. If the procedure is fair, y'all should larn solely a proportion of the shares y'all asked for, alongside the proportion getting smaller as the shares larn to a greater extent than nether priced. If the procedure is fixed in addition to the investment banks give root dibs to their preferred customers, the proportion y'all get, if y'all are non i of the preferred customers, volition live on fifty-fifty lower. Thus, the solely scenario y'all should dread if y'all are non a preferred client is i where y'all larn your entire allocation filled, because that is an indication that the shares are over priced.
This allocation procedure has ever been the achilles heel of strategies that endeavour to invest across all IPO offerings. You may bid for $100,000 worth of shares of every IPO for the adjacent year, simply y'all volition terminate upward alongside a portfolio that has likewise picayune invested inwards the most nether priced IPOs (since y'all volition larn far fewer shares than y'all requested inwards these) in addition to likewise much inwards the most over priced IPOs (since y'all volition larn all of the shares y'all asked for alongside these).
2. The stock has to popular on the offering date
Once y'all receive got been allotted the shares at the offering price, y'all receive got to promise for a stock cost popular on the offering date. You do receive got history on your side. Looking across all IPOs, in that location is bear witness of an offering 24-hour interval increase inwards stock prices. The figure below graphs out the average "under pricing" across all IPOs, yesteryear year, for US of America stocks:
Note, though, that this homecoming presupposes that y'all tin invest an equal amount inwards each IPO, nether priced or not, simply it is withal impressive. Over the entire 50 twelvemonth fourth dimension period, in that location receive got been solely 4 years (1962, 1973-1975) where the average returns were negative, in addition to in that location are periods, such as the belatedly 1990s, where the average homecoming is unopen to 100% (doubling of cost on the offering date). That is adept intelligence for the "Facebook IPO Pop" strategy.
Before y'all larn likewise excited, though, annotation that the nether pricing is greatest alongside the smallest offerings, as evidenced inwards the graph below:
Given the size of the Facebook offering (even 5% of $100 billion makes this a large offering), this graph should atomic number 82 y'all to lower your expectations of the cost popular on the offering date.
There is also bear witness that this nether pricing is yesteryear design. The IPO pricing cookbook at most investment banks includes a "take 15% off the value" element inwards every pricing recipe, since the positive intelligence stories that accompany the popular are viewed as a sales pitch for hereafter stock issues. The nether pricing also is consistent alongside the incentives for investment banks, who to a greater extent than oft than non guarantee the offering cost to the issuers, in addition to so receive got fare to a greater extent than to lose yesteryear over pricing than from nether pricing.
This IPO nether pricing has been the source of angst for some, who experience that the nether pricing is unfair to the founders/owners of the companionship going public, since they are leaving money on the table, yesteryear offering their shares at a discounted price. That argument, though, becomes less persuasive, when y'all recognize that solely a small-scale portion of the outstanding shares is to a greater extent than oft than non offered on the offering date. The discounted cost on these shares operates the same agency a loss leader operates inwards a retail store: it is designed to whet your appetite in addition to larn y'all to purchase more. You promise that those who purchase these shares (and experience adept nigh the profits they make) volition live on dorsum inwards half dozen months or a twelvemonth to purchase to a greater extent than shares inwards the company. So, if y'all are feeling distressing for pathetic Mark Zuckerberg on the offering date, don't worry! There are enough to a greater extent than shares inwards Facebook that volition live on hitting the marketplace inwards hereafter years.
From an investor's perspective, what tin travel wrong? Note that the average is across all IPOs (and is skewed yesteryear the smallest IPOs) in addition to that a subset of IPOs come across a drib inwards cost on the offering date. These are of class the IPOs where y'all got all of the shares y'all asked for. If y'all are non a preferred customer, your odds of making money on IPOs decrease. Even the preferred customers are offered a mixed bag. Not solely does their preference stalk from the large amounts that they pay the investment banks for other services rendered, simply they are expected to live on "good" investors. In other words, if they flip the stock presently afterwards the offering, it may endanger their preferred condition on hereafter IPOs. More on that inwards the adjacent section!
3. You receive got to fourth dimension your leave of absence well
Assume straight off that the root 2 pieces of the puzzle receive got fallen into place. You receive got been allotted shares inwards the Facebook IPO in addition to the stock has popped 15% on the offering date. Should y'all sell straight off or should y'all wait? That eternal question has particular resonance alongside IPOs, because the gains on the offering engagement tin live on fleeting. Remember that Groupon's 20% fountain on the offering engagement is straight off all gone!
Studies that rail the post-offering functioning of IPOs propose that they do are non adept investments inwards the aftermath. In the figure below, nosotros compare the returns inwards the root 5 years afterwards an initial populace offering, alongside the returns on non-IPO stocks.
The returns on IPOs lag the returns on other stocks inwards the marketplace in addition to do in addition to so much to a greater extent than inwards the root few years afterwards the offering. Thus, if buying at the offering cost requires y'all to handle the stock for a twelvemonth or 2 (which may live on required of y'all as a preferred customer), y'all may non live on getting a peachy deal.
In fact, my valuation of Facebook is predicated on the supposition that y'all may desire to handle Facebook for to a greater extent than than a 24-hour interval inwards your portfolio. If y'all do, in i lawsuit the buzz fades in addition to the IPO paparazzi leave, the companionship volition live on judged increasingly yesteryear how it performs relative to expectations. If cost in addition to value are on a collision course, value ever wins out.
4. You are playing a sector in addition to momentum game, fifty-fifty if y'all don't desire to...
If y'all bid for shares inwards the Facebook IPO offering, I do believe that the odds may live on inwards your favor for winning the game, if y'all define winning as getting the shares at the offering cost in addition to flipping them real chop-chop afterwards the IPO. Much as I am tempted to bring together you, I am afraid I volition sit down out that game in addition to non because of whatsoever noble impulses (such as wanting to live on a long term investor or non speculating).
The IPO game is a subset of the momentum game, on which I receive got posted before. It is a game that produces large winners simply momentum ever turns, in addition to when it does, it creates large losers. To come across the link, annotation that IPOs travel through hot in addition to mutual frigidness phases, alongside years inwards which y'all receive got hundreds of IPOs in addition to years inwards which y'all receive got a few dozen.
In addition, also annotation that IPOs inwards whatsoever given twelvemonth tend to live on concentrated inwards a few sectors in addition to those sectors to a greater extent than oft than non receive got momentum on their side (dot com stocks inwards the 1990s, social media companies today). Thus, the success of IPOs inwards a sector is closely tied to whether the sector maintains it "hot" status.
One worrisome aspect of IPOs is that they may operate as canaries inwards the coal mine inwards signaling momentum shifts; the loss of enthusiasm for point com IPOs (and the withdrawals of some) coincided alongside the epic collapse of the sector that year. The momentum driving social media companies volition terminate i 24-hour interval in addition to it may real good live on the 24-hour interval that Facebook goes public. "Unlikely", y'all say, in addition to I agree, simply the tough part of beingness a lemming is that y'all never know where the cliff is coming. Of course, y'all may live on able to sense momentum alter much amend than I, inwards which illustration y'all should live on able to play the game successfully.
Bottom line
H5N1 strategy of investing inwards IPOs at the offering cost looks much amend on newspaper than it plant inwards practice. All of the academic studies that exhibit the average underpricing are implicitly based upon the supposition that y'all tin create an as weighted portfolio of all IPOs, when inwards fact, a non-discriminating investor volition terminate upward will live on alongside likewise much invested inwards all of the worst IPOs.
The strategy tin live on made to travel yesteryear an investor who uses analysis (valuation or information) to invest solely inwards IPOs that are most probable to live on nether priced in addition to follows through alongside timely selling to capture profits afterwards the offering. Even for that investor, it is a supplementary strategy since in that location volition extended periods where in that location are no or real few IPOs inwards the market.
So, if y'all are bidding for those Facebook shares, adept luck. I promise y'all larn solely a fraction of the shares y'all enquire for (see part 1 for why), that the stock cost pops on the offering date, that y'all larn out earlier the you-know-what hits the fan. in addition to that y'all are non the unfortunate individual who helps band inwards the terminate of the social media circus.
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