The IPO boom and the odds of making listing gains

General
1

Someone said in the comments, the market can be boring for months, but give people an IPO and suddenly everyone starts talking about it. This is so true. :grimacing:

Sharing Nithin’s tweet from yesterday:

While the broader markets have gone nowhere, the primary market (IPOs, OFS, and FPOs) is red hot. By capital raised, this year is already on track to match, if not surpass, the last two years. And there’s a big pipeline of IPOs coming up:

Even at Zerodha, there’s been a big spike in IPO applications, including people opening accounts just to apply.

If you’re hoping to make easy money from IPOs, the second chart should give you some sense of the odds. It shows the distribution of listing gains over the last few years. Roughly 74–80% of IPOs opened above their issue price, but a good chunk of them didn’t exactly deliver spectacular gains.

In the latest period, 35% opened just 0–10% higher, while about 26% opened below the issue price.

By the way, the one thing this chart doesn’t show is that the more popular the IPO, the lower your odds of actually getting an allotment.

But hope, I guess.

HRNo_BcaAAA9EAa
HRNo_BcaAAA9EAa1600×1120 34.1 KB

HRNo_BPbQAASFTN
HRNo_BPbQAASFTN941×553 68.9 KB

2

The “rationale” behind the irrational behavior
is nicely capture in this article i came across recently.

Highlighting key excerpts from the article, below -

James was recently giving a seminar to young associates at a prominent venture capital firm. He talked about our ideas for sound personal financial decision making: save at least 20% of your income, pay attention to fees and taxes, watch your behavioral foibles, and keep most of your investments in index funds.

As James wrapped up, one of the associates – we’ll call him Billy – raised his hand. “But if I follow your advice,” he said, “I’ll never become a billionaire!” More than a few heads in the room nodded along.

Say Billy expects to earn about $10 million after tax over his career, and save 20% of it, or $2 million. Let’s say he has 50 years to turn that $2 million into $1 billion, a 500x increase.

…

What’s the best strategy, and what probability of success does it give him? It’s a tricky problem, but it was actually solved back in 1961 in a somewhat obscure paper by UC Berkeley professor Leo Breiman. The answer: with the optimal strategy, Billy can achieve a 7% chance of becoming a billionaire.

The Catch ?
Seven percent sounds pretty good. Only about 0.001% of Americans are billionaires, and probably only around 0.05% of people who’ve managed to save $2 million ever get there. A 7% shot is a huge improvement.

But look at the other 93% of outcomes. In those cases, Billy doesn’t just fall short of a billion – he goes broke. That’s because the strategy that maximizes his odds of hitting $1 billion requires him to routinely bet 100% of his wealth, with also means he’ll routinely go broke. Every path that doesn’t end in a billion ends instead with an all-in bet that loses. There’s no soft landing; there’s no “I’m almost a billionaire.”

The absolute values / scale may be different,
but it is the same sentiment of

"Need to over provision,
i.e. need to massively multiply asset value
that ONLY financial instruments can possibly offer"

which inevitably leads to such irrational exuberance in financial markets.

So, unless one is willing to think beyond financial instruments/markets,
for wealth creation/preservation,
one is simply running with blinders on. :face_with_diagonal_mouth:

To folks with overt financialization of their individual personal finances,
what’s the equivalent of telling them to “Please touch grass” ?