IPO

While IPOs in their literal sense mean that the company is for the first time issuing its stock to the general public, in reality whichever company is coming out with an offer to sell its share to the general public is known to go the IPO route. So that also includes company who already have their stock trading in the stock market.

Generally the investing community is excited about IPOs because traditionally it was thought that during its first offer companies sell their stock to the general public at a discount to their intrinsic value. While this was true for the Indian markets a few years ago one look at the IPOs coming out today tells us that this is not true anymore. Many companies who do not even have a financial history of five years or so, come out with IPOs to take advantage of the booming financial markets and therefore are not only ‘not’ selling their stock at a discount but even at outrageous prices.

There can be two kinds of investors for IPOs the long term investors who have bought the stock because they believe in the company and think that by holding the stock of the company for a long period they will be able to make profits. The other kind is the short term investors who just buy into the IPO to sell during the initial few days or even hours of listing and make what are known as listing gains.

While investing in IPOs investors should be careful about the history of the company because a lot of companies these days are just listing their shares out because they think that they can take advantage of the general optimism which prevails today in the markets.

The operational history can be a good judge and along with the pedigree of the promoters these two parameters can be a very good indicator of whether to invest in a stock or not.

After analysing the past performance of the company and making sure that the IPO is not being issued by fly by night operators, an investor needs to look at the price at which the IPO is being issued at and decide whether it is a fair price or not. While there is no fixed indicator for this the P/E Multiple provides a good yardstick and you can see what P/E is being demanded by the issuing company and whether it compares with the P/E that prevails in the industry. An important and often unnoticed thing about the P/E Multiple of IPOs is that it is calculated on the current number of shares that the company has got. However as soon as the IPO takes place most of the times fresh shares are issued in the market which will automatically push the P/E Multiple higher by pushing the EPS lower. So whatever P/E you are looking at, keep in mind that you will have to increase that by a bit most of the times after issue of stock.

These are a few tips to be taken care of while investing in IPOs so that  you don’t end up burning your fingers.

When is the right time to sell?

Not long ago I had written about when is the right time to sell, at that time the market was peaking and there were quite a few stocks that were overvalued or were at least at a price that was "sellable". For investors who had sold stocks at that time, right now with the blood shed in the market there are quite a few good stocks which are trading at prices which are there all time lows and because fundamentally nothing has changed in these companies they can be bought at these prices. However if investors didn't sell at that time then there is still time for them to sell but this time unfortunately not for the reason of booking profits as was the case when I wrote the last piece but for the purpose of cutting losses.

The key at times such as this when there are heavy falls and investors end up losing a lot of money is to sit back and take stock of your portfolio. Essentially you would be able to categorize your stocks into three categories. First category stocks would be the ones that are fundamentally sound, nothing has changed in their business model and growth projections and are companies that have been in the business for years together, these are your standard blue chips. There is absolutely no sense in getting rid of these stocks in panic. These are companies that have lasted for years and are more than likely to bounce back. The second category are mid-caps and small-caps which have also done well in the past few years but don't have a stellar track record like the blue chips or haven't been long enough. If these have been bought by an investor at recent times and at very high prices (high P/E multiples relative to their growth rates) you may want to look at selling these stocks and cut your losses. These stocks have a tendency to be very volatile and may dent your portfolio in a matter of a few trading sessions. However if these are stocks which have been with you for a long period of time bought at decent prices, then you may want to hold on to them if nothing in their business or money making model has fundamentally changed. One such stock in my own portfolio is Dewan Housing Finance, not exactly a blue chip but a sound company which has done well over the years and which was bought at reasonable price about an year ago. I would hold on to this stock as nothing that would affect its earning ability has changed and the stock should bounce back as sanity is restored in the market. The third category is of stocks which had been bought purely on tips and the names of which you yourself had heard for the first time and which have no financial track record only promises. Get rid of them as soon as possible and cut your losses. Buying stocks without research and only on tips is the worst thing that any investor can do and better to learn from that mistake than to hold on to such stocks and make more losses.

There would however be sure to be a few investors who had sold stocks at that time and are sitting on some cash. They could buy some bargain picks which are going around in the market right now.

Growth in stocks is not linear

One interesting thing that I have learned in the last few days with the market boom is that growth of stocks is not linear like bonds or FDs. What that means is that while your fixed deposits will grow at a certain rate always and say will increase by 10% in six months and then another 10% in six months your stocks grow in a way which is not linear at all. Your stocks may remain stagnant for 11 months or even give negative return and then in the last month may grow by 30%.

I've wanted to write this post for a long time but I wanted to collect some data and present it before writing it. I figure if I wait to collect that data first then will never get around to writing this post. Anyone who wants to validate this though can go to www.nseindia.com and look up any stock and then see in which months it has risen by how much percentage and they will have their answer.

The point here is that many a times investors lose patience thinking that it's been over a year since they bought the stock and there have been no returns on it and maybe it’s a wrong decision etc. However if nothing has changed fundamentally then just this is not a good enough reason to sell your stock. There is absolutely no limit to how much a stock can grow in just a few days and which it does also but most of the times after you have already sold your shares.

This concept is very easy to understand however it is somehow not very easy to avoid the pitfalls that thinking along these lines brings to investors. That pitfall is holding a share for ages and then selling it just before it rises for the only reason that the stock didn't rise in all these days.

The key is to have patience and not sell only for the reason that it is not rising.

When is the right time to sell?

There is an adage in Dalal Street which goes "regret after selling and not after buying".

Many a times you would see investors who have sold stocks at profit however as soon as they sold their shares, the share went up another 10% in a matter of days. Hence the investor rather than basking in profits is brooding about the loss in profits that he could make if he had waited for a few more days.

Wisdom says this is better than buying a stock and then repenting because it goes down 10% after a few hours of your purchase, which incidentally occurs more number of times than is good for any honest tax paying citizen's metabolism.

With the market scaling all time highs and that too bouncing back in a really short time and being as volatile as it is today, one can rest assured that the stocks which have gone up will go down as well and its best to book profits at least to some extent so that if the market goes down your profits do not vanish away completely and at the same time if the market goes further up you are not just sitting on the sidelines and watching the value of the stock that you once owned go up.

For a long term investor it important not to rush while selling, and there isn't a need to book profits out of all stocks that you hold in your portfolio. If you have been patient enough and have bought and kept stocks for over a couple of years, chances are that at least one or two of them are bringing you excess of 100% returns.  In all probability one of these stocks would be overvalued as well, because of the general atmosphere that exists in a bull run, another great plus is that if you own stock for over one year it comes under a long term investment and no tax need to be paid for the capital gains from such appreciation.

Therefore a combination of these three factors 1. One of the stocks which are bringing in the greatest return in your portfolio, 2. Stock priced more than what you think should be the fair value and 3. Stock owned for over a year give a good yardstick to sell.

If you are holding a stock for a fairly long term you would have a good idea on what its worth is but as a general and quick guideline if the P/E exceeds the growth rate considerably then you can look at booking some profits in the stock.

There is no sure shot way of either predicting the bottom or the top when one is dealing with the markets the best one can do is over a long term stick to some sort of game-plan which brings more profits than would have accrued if the investor had just invested in fixed deposits or bonds.