It’s Probably Overpriced.

Imaginary Profits Only.

Insiders’ Private Opportunity.

Idiotic, Preposterous, and Outrageous.

I’m currently reading “The Intelligent Investor” by Benjamin Graham and it’s such a phenomenal piece of literature that I can’t help but savor every moment of it. As Graham debunks and empowers the lay man with investing advice he touches on IPOs, something I’m quite interested in. He has some great insight that’s important to remember.

“If, like nearly every investor, you can get access to IPOs only after their shares have rocketed above the exclusive initial price, your results will be terrible. From 1980 thorough 2001, if you had bought the average IPO at its first public closing price and held on for three yours you would have underperformed the market by more than 23 percentage points annually.

A good example of that is VA Linux. The initially IPO was set at the price of $30 but demand for the shares were so ferocious that when the NASDAQ opened that morning none of the initial owners of VA Linux would let go of any shares until the price hit $299. The stock peaked at $320 and closed at $239.25, a gain fo 697.5% in a single day. But that gain was earned by only a handful of institutional traders.

More important, buying IIPOs is a bad idea because it flagrantly violates one of Grahams’ most fundamental rules: NO matter how many other people want to buy a stock you should buy only if the stock is a cheap way to own a desirable business.

At the peak price on day one, investors were valuing VA Linux’s share at 12.7 billion. Less than five old Linux had generated 15 million in sales but had lot 10 million dollars. This business then was losing almost 70 cent on every dollar it took in.

And that my friends is how you present an argument.