IPO - An Initial Ponzi Offering?

August 30, 2022 by Ayush Anjana · 5 min read


IPO - Initial Ponzi Offering?

Initial Public Offerings (IPO) are made by the companies to raise money in exchange of ownership in the business , the true intention of the IPO can be measured with the reason to go for the IPO 

Companies do IPO mainly for :

  • Debt reduction - companies which raise money to reduce/eliminate debt.
  • Expansion plans - Campus Shoes
  • Offer for sale where existing promoter sell their shares - Car trade (100% offer for sale)

Note : Offer for sale IPOs also have a certain % of stake for offer but a 100% is a complete exit for the existing promoters.

But have you ever given it a thought as to why retail in general ends up losing big in IPOs rather than making money? The simple answer is the conception of IPO as a lottery ticket to double the money in 7 days in a bull market. One or two hit IPO makes retail participants psychologically believe that there is no risk investing in IPO and a lot of people open demat accounts to apply for the largest offering with the conception of how can such a big company go wrong without adequate understanding of valuation. The size of the IPO also matters a lot. If we go into the history, the largest size IPOs have never excited the Dalal Street whether it was Reliance Power in 2008 ,  Coal India in 2010 , Paytm in 2021 or LIC in 2022. All have given muted to negative returns, the reason being in the race of aggressive valuation in the bull market, IPO never end up making Mr market happy. As an investor, a company’s valuation is a subjective topic which differs for each other. Whether you look into an IPO coming in a raging bull market or not , but you might wish to have an eye for an IPO coming in a depressing bear phase, as late renowned investor Parag Parikh said, “Bull markets are for IPOs and bear markets are for value”.

My take on IPOs being a momentum Investor :

IPOs are a big avoid. Being a momentum investor , all we seek for is price structure and volume behavior which in simple terms is the price movement which an IPO never has , so does it mean momentum investors never end up buying IPO stocks - the answer to that is wait for at least one quarter and let the price decide! Simplicity is the highest sophistication. So to keep it crystal clear, how will we make money? Only when we enter and the price goes up eventually. Which when teamed up with the philosophy of cut your losses as early as possible and let your winners run , gives the idea of any momentum based system.

How does the price decide what will happen to the new listed stock ?

The simplest answer is IRB , IPO → Range → Breakout. Of all the things that the price can end up doing is either be in range and trend or vice versa! Simply talking theory doesn’t make an interesting point , among all the IPO that came after march 2020 , 23 out of 90 have stood at more than -20% returns as current gains and 42 out of 90 standing at current gains at more than 20% . so how do we avoid the laggard and ride the winners , the idea is IRB

Let’s take the example of the IPOs which gave extreme returns in both sides

The wealth destroyers

  • Paytm (-67.48%)

Stocks opens in discount , followed by a upward pullback which is unable to cross the high of the IPO day and the range which was made was broken on the downside

  • Suryoday small finance bank (-72.36%)

Stock opens in a discount on the IPO day which ends up in a inside bar range for a number of days and the range broken on downside and the stock ends up losing 72% as of 7th july

  • AGS Transact (-58.17%)

Stock opens in a discount , attempts to cross the high of the IPO day which is failed and the range formed is broken on the downside leading to a downfall of 58%

  • Zomato (-30%) 

A special case which initially formed a range with a upside breakout which eventually failed and the range later broke on the downside , the best lesson here is “Cut your losers short”

All IPO aren’t wealth destroyer , there have been wealth compounders which are as follow:-

  • DMART -Traded in a range for an initial quarter and rallied more than 360% till date.

  • Adani Wilmar - Initial Range which gave an upside breakout with 50% move 

  • Happiest minds -Initial range broken upside giving good returns

  • Easy Trip planners -Initial range broken upside giving more than 240% returns

If there is something common with either the IPO turns compounder or a destroyer after listing is the range it forms consolidating and then breaking out in any direction ,thus taken care along with cutting the losers short and letting the winners ride can be a good system to lookout for IPOs

The only thing we can conclude via analyzing the extreme IPOs on both sides are :-

  • IPO is not a lottery ticket and having an exit even for an allotted IPO is must
  • Unless you track the newly listed IPO you never get upside breakouts such as happiest minds, adani wilmar , latent view , dmart etc
  • It’s way better to book small losses before they end up becoming blunders
  • Even for a winner , due tracking is required to preserve the gains you sit up at.

Happy compounding!