Category: Investing Insight

Investing insight to make you a better investor.

IPOs Revisited

IPO performance

We had come out with the StockViz 5-day rule for IPOs back in July-2012 which basically stated that “if it [the stock] doesn’t pop within the first 5 days, chances are that it never will.” And subsequent performance of IPOs have validated that rule.

Since August-2012, there have been 53 IPOs, of which only 2 have made any real money for investors over the long-term: JUSTDIAL and REPCOHOME. Here’s how the 5-,10-,20-,50-,100-,200-day average return for IPOs look like, juxtaposed on the NIFTYBEES ETF return:

returns

The IPOs that made money were not slam-dunks either. Here’s a splattering of commentary on Just Dial:

  • Hindu Business Line: Avoid (source)
  • Economic Times: Avoid (source)
  • Aditya Birla Money: Avoid (source)
  • Microsec: Seems unattractive, subscribe for listing gains (source)
  • HDFC Securities: Avoid (source)
  • GEPL Capital: Subscribe (source)
  • VS Fernando: Avoid (source)

There simply isn’t enough information about the company to evaluate whether the stock is a good investment or not at the time of the IPO. However, if you followed the rule, you would have cut your losses and retained the winners.

When it comes to investing in IPOs, remember the StockViz 5-day rule!

[stockquote]JUSTDIAL[/stockquote] [stockquote]REPCOHOME[/stockquote]

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The answer is that there is no answer

Here are a bunch of excerpts from articles I have been reading that might sway you to conclude that all investment managers are bipolar masochists.

Howard Marks

The truth is, almost everything about superior investing is a two edged sword:

  • If you invest, you will lose money if the market declines.
  • If you don’t invest, you will miss out on gains if the market rises.
  • Market timing will add value if it is done right.
  • Buy-and-hold will produce better results if timing can’t be done right.
  • Aggressiveness will help when the market rises but hurt when it falls.
  • Defensiveness will help when the market falls but hurt when it rises.
  • If you concentrate your portfolio, your mistakes will kill you.
  • If you diversify, the payoff from your successes will be diminished.
  • If you employ leverage, your successes will be magnified.
  • If you employ leverage, your mistakes will be magnified.

Source: Dare to be Great II

Cam Hui

Value works. Growth works. Momentum works. Quality works. They just don’t all work at the same time. A combination of these factors work most of the time, but there are times when a single factor is dominant.

You have to be able to recognize the regime shifts and deploy the right combination of models out of your toolkit accordingly.

Source: A quant lesson from a technician

Herb Greenberg

The worst mistakes often come from being too smart for your own good, especially when putting too much trust in your experience, perspective and instincts.

Lessons learnt:

  1. The rules of retail can indeed be broken.
  2. Never count on the insular feeling of superiority of big, lumbering companies to catch a trend.
  3. Don’t overlook the obvious.
  4. As long as a company has a product customers fall head-over-heels for, the economics don’t matter until the growth stops.
  5. Good execution and a charismatic, brilliant CEO trump making money.

Source: My Worst Mistakes

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Post-hoc Technical Analysis

Michael Harris over at Price Action Lab:

Saying that “if these levels hold prices will rise and if they do not, prices will fall”, is a statement that confuses event order. Price moves first and then we decide whether some level or indicator was violated. If a level does not hold, it is because price already moved below it or above it. It is not the other way around.
 
In technical analysis, use of any derivative of price, including support and resistance levels, indicators or patterns, is often useless, unless there is a measure of the probability of some event. Otherwise, just describing these levels is either only stating the facts or it is naive analysis due to ignorance.

Source: Technical Analysts Who Have Their Cake and Eat it Too

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Financialization of People

Mike Konczal has a thought provoking article in TheNewInquiry that connects the dots on futures trading and comes a full circle:

Futures allow people to buy and sell a specific quantity of a product now for cash, with the product delivered at some point in the future.
 
For example, contracts for the future delivery of cattle have existed since at least the 1850s, when farmers met in Chicago agreed to buy and sell corn. But how do you know that you aren’t going to get screwed on delivery? If you agree to buy new cattle years from now, what’s to say that you won’t get the weakest, malnourished cattle available?
 
The CME’s rulebook for a Live Cattle Future specifies what qualifies as a “deliverable” cattle. First off, “No individual animal weighing less than 1,050 pounds or more than 1,500 pounds” shall be deliverable as a cattle. “Unmerchantable” cattle, such as those that are “crippled, sick, obviously damaged or bruised,” are not acceptable.
 
Cattle that don’t fit the relatively wide characteristics aren’t tossed aside. They are “discounted” — sold at a loss for a smaller percentage of the contract. This discount is meant to penalize the grower while reducing immediate waste of unsellable merchandise.

 
And now comes the scary part:

Can “human capital” be traded?

The most likely route for human-capital futures is standardizing through funding for individual education. One can imagine contracts that would mark using your degree for certain kinds of low-paying social work as “undeliverable” on the promise of your human capital, with your debt burden being adjusted accordingly.

 
Read the whole thing: Buying the Future

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Reel Life vs. Real Life

Jim Jubak, beginning in 1997 and continuing for twelve years, wrote one of the first and ultimately the best-read stock picking column on the Internet, “Jubak’s Journal,” for Microsoft’s MSN Money. His initial boss, a hotshot software guy, said: “If you’re so good as a stock picker why don’t you do what no one else does and issue clear buys and sells and then track the results.” That resulted in what we believe was the first online, daily-priced stock portfolio on the Internet, Jubak’s Picks.Jim Jubak

In 2010, Jubak apparently decided that investment management looked awfully easy and so launched his own fund.

Which stunk. Over the three years of its existence, it’s trailed 99% of its peers. And so the Board of Trustees of the Trust has approved a Plan of Liquidation which authorizes the termination, liquidation and dissolution of the Jubak Global Equity Fund (JUBAX).

Ben Carlson over @awealthofcs notes:

There is a constant barrage of people they throw at you in the financial media, each one a seeming expert in their field. The majority of these people spend their time making endless predictions about stocks, the economy, interest rates, company earnings, etc.

Because these are all intelligent-sounding people, it’s very easy to get sucked into believing every single forecast they put out there. Some will be right some of the time. Most are wrong most of the time.

What’s surprising is not that Jubak setup his own mutual fund, but the fact that it still has $16 million in assets. Go figure…

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