The Poor Investor – Investigatory Value Investing

"Faber est suae quisque fortunae" -Appius Claudius Caecus

Thank You Facebook and Morgan Stanley

There is much to be said about the Facebook IPO but suffice it to say it was a huge disaster.  There was even talk in the Wall Street Journal about how the whole debacle may have hurt overall investor confidence.  Not surprisingly, the average Joe is probably more than likely to avoid IPOs in the future.  But would the average Joe be right to do so?  Maybe investors should thank Facebook and Morgan Stanley for botching the offering and turning them away from IPOs.

“Three out of four have been long-term disappointments,” said famed investor Peter Lynch of IPOs.  Let’s see if he is right.

From November 1st, 2010 to May 26, 2011 there were 157 IPOs for which I found accurate data.  If you had invested $100 in each of them at their initial offering price, you would have $14,735 today— a total loss of $965.  If you include brokerage fees, assuming $7 per stock bought, you’d be in the red by $2064, not including the fees to sell.  Your chance of investing in one of those 157 IPOs and actually making money (>$1): 36.3%.  Doubling your money or greater: 5.7%.  Hitting a ten-bagger: 0.0%.  Losing 50% or more: 24.2%.  Losing it all: 1.9%.

Turns out Peter Lynch wasn’t too far off.  Out of the IPOs investigated, approximately 3 out of 5 turned out to be long-term disappointments.

After looking over the data it’s unlikely that you’re going to do well with an IPO.  The odds are stacked against you.  Even worse, most companies are too new to have a history to go off of.  There’s also no guarantee that you’re going to get the IPO price.

When asked which stocks he’d avoid in the market at the Berkshire Hathaway annual meeting, Charlie Munger replied, “new issues.”  Perhaps investors should heed that advice.

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2 responses to “Thank You Facebook and Morgan Stanley

  1. satfactor June 6, 2012 at 5:32 pm

    Your data set is too small to make any reasonable conclusions !!

    • The Poor Investor June 7, 2012 at 3:08 pm

      This data set contains 7% error. I am looking to add more data soon. Thanks for your input.

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