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Initial Public Offer or Insanity Pervasive Openly

Posted By: Admin

In recent times the overwhelming success of various IPOs is huge. It seems like investing in IPOs is the sure shot way to become wealthy in life. At Least that is what seems to be the story over the last few months. Last when  Nykaa, the online beauty & fashion delivery company got over subscribed an incredible multiple and listed at a near double the valuation at which it was offered. 

How can a company that delivers lipsticks & nail polish to its customers command such a superlative price ? In fact many of these internet based services companies are in deep losses as well. The joke is that higher the loss, bigger will be the listing gain. 

Welcome to the Herd mindset and recency bias at play here…

Recency bias is a cognitive bias wherein recent events bear more significantly in one's mind than taking an overall view. So after the big success of the Zomato IPO, every newbie investing in the stock market figures that every internet delivery company will at least double the money.. and they are not wrong.. at least not yet…

Herd mentality because this is not being done by one individual, but by a large segment of the market that is not used to equity investing. So there is a herd mindset at play where each one is looking at another and doing the same thing. There is no need to do any analytics if you are just copying your friend's investment action. The assumption is that he has already done the homework so it must be good. The problem is that everyone is thinking that the other has done the research.

This appears similar to 2000-01, when there was a tech bubble and share prices of companies went beyond the roof, only that those prices were never achieved again and many companies went bust and few investors took more than 10 years to realise their capital back.  

 So it is important to ask yourself these three questions, 

  1. Will I continue to hold this investment even if the price falls down by 50% ; 
  2. I am so fond of this company that if the stock market was shut for 5 years, I would still be happy holding this company for the potential it offers ; 
  3. If there is a significant price corrections, I would add more of this stock to my portfolio ; 

If the answer to these three questions is a YES, then you  have nothing to  worry about. 

If the answer to any of  these questions is a NO, then you have lots to worry. You have bought because someone has told you to invest. This is not the smartest way to invest. 

The best way to lose money is to invest without knowing fully about the investment that you are making.  

As Warren buffett would have said ,

 

Rule  no :  1 : Never lose Money ;

Rule no : 2 : Never forget Rule no : 1.  

So think about it, is it Initial Public Offer or Insanity Pervasive Openly ?

By Babu Krishnamoorthy , Chief Sherpa

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