Why investing in every IPO is a great strategy

Posted by Andrew Main 26 August 2016 @ 12:00am

There’s something about being offered access to an IPO that might remind you of taking your first dive into a swimming pool. Is it going to be cold? Are you going to flail then drop like a rock to the bottom of the pool and become an unfortunate statistic?

I can’t answer for the first one (in Scotland, where I come from, it usually was) but the answer to the second question, at least in swimming terms, is almost certainly no.

If you’re only going to buy into one IPO then yes, there’s inevitably some risk, but if you buy into more than one, the risk drops away dramatically. To be specific, if you’d bought into every IPO in Australia in 2016 you’d have enjoyed an average 17 per cent return on the first day.

By today’s low growth, low return standards that is a truly impressive statistic.

It’s pretty hypothetical to put it that way since there have been a bit over 95 IPOs in that time and your lifestyle choices might mean you have something other to do than study prospectuses all day, never mind actually get access to them, which has been a challenge for ordinary investors for as long as IPOs have been around, but it shows two things.

The first is the risk minimisation issue and the second is that every investor should be looking closely at those IPO returns, in the context of which other asset class would even get them close to that.

That 17 per cent return isn’t an annual number. It represents what you can expect to make by way of a capital gain between the time you apply for shares and the time the proceeds drop into your trading account, if you sell on Day One.

How long is that? If you get a late allocation, it might be a week. But more commonly you should assume it could take a month. Meaning, if you were a very well organised investor with a very steady flow of IPOs to get into, you could make many times that return over the course of a year.

Another way to look at smoothing your risk is to consider that buying into IPOs is not some gamble where you are betting against the house: you are buying far more options than that.

You can decide whether your foray into IPOs is a marathon or a sprint.

Investing in IPOs has a number of inbuilt advantages. One, the float promoters want to attract investors and the time honoured way is to apply some sort of discount to the issue. Two, the simple fact that shares go from being untradeable to tradeable with the ringing of a bell on float day means that they automatically become more desirable.

Of course there are mispriced floats out there. Promoters and vendors can get greedy and market conditions vary between red hot and outright terrible but safe to say that the majority of IPOs are well priced. And I haven’t even mentioned blue sky, the chance to get a really significant return on your investment.

Bearing in mind that the most you can lose is your original stake, some of the long term returns of sharemarket investing have been quite dazzling.

Say you bought into Commonwealth Bank when it was privatised in 1991 at $6.75 a share. Those shares are now worth around $86* each. Putting aside the generous dividends that have been paid in the interim, you’d be up more than ten times on your original investment.

Or Cochlear, the hearing specialist listed in 1995 at $2.90 a share. Again ignoring dividends, you’d be up more than 45 times on your original stake given the shares are now worth around $135* each.

They are good examples of the joys of long term investing but you can also get very good returns over short periods if all goes well. Aurora Labs, a more recent tech IPO listed in August 2016. The 3D printer developer listed at $0.20 and is now worth over $2* each. That’s over 900 per cent price performance.

As they say in the US: “You do the math.”

*Figures as at 30 March 2017