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Peking duck made by chef Xiang Ming Li at Man Ri Sung Korean Restaurant in Richmond, B.C. September 19, 2012. (John Lehmann/The Globe and Mail)
Peking duck made by chef Xiang Ming Li at Man Ri Sung Korean Restaurant in Richmond, B.C. September 19, 2012. (John Lehmann/The Globe and Mail)

Trading Shots

Who wins in IPOs? Not investors Add to ...

The stock market comes with its own animal kingdom, the more common species being bulls, bears and pigs. Less well known is the humble duck.

We know ducks inhabit stock-market environs because a battle cry often heard at brokerage firms goes: “The ducks are quacking, let’s feed them.” Translated into layperson’s terms, this reads: “Investors are hungry for stocks, let’s sell them a boatload of initial public offerings.”

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The usual outcome for the “ducks” is a good plucking and roasting. A recent illustration, of course, was the Facebook IPO in May: after hitting a $45 peak on the first day of trading, the “ducks” saw their shares nosedive to $20 by September.

What might help is if the investing community had a greater familiarity with the findings of academic researchers and opinions of legendary investors. When it comes to IPOs, they are downright hostile toward them.

Take University of Florida professor Jay Ritter, the leading scholar on IPOs. His research shows that IPOs tend to underperform the market. One of his studies, for example, found that U.S. IPOs underperformed non-issuing firms by more than 25 per cent over five-year periods.

In Canada, professors Maher Kooli and Jean-Marc Suret concluded that “investors who buy immediately after listing and hold shares for five years will make a loss of 24.6 per cent relative to an investment in the control firms.” Two other professors, Vijay Jog and Hari Srivastava, found that Canadian IPOs underperformed by 18 per cent over three-year periods.

Great investors are on the same page. In A Random Walk Down Wall Street, Burton Malkiel notes: “Most initial public offerings underperform the stock market as a whole.” That’s not surprising given, as Mr. Malkiel states, managers try to time their IPOs to coincide with a peak in the prosperity of their companies.

In The Intelligent Investor, Benjamin Graham says an “elementary requirement for the intelligent investor is an ability to resist the blandishments of salesmen offering new common stock issues during bull markets.” Some will be excellent buys “a few years later when nobody wants them,” he adds.

In The Investment Zoo, Stephan Jarislowsky observes that “new issues are typically well promoted.” From his experience, he has found that investors can buy nine out of 10 new issues at a lower price a year or two later.

So, the next time a hot new issue makes the headlines, give it a few months of trading on the exchange. Let the hype die down before considering a purchase.

READERS: Is there ever a good time to be a quacking duck? Share your stories of successful or unsuccessful IPO involvment in the comments.

Larry MacDonald once worked as an economist in the federal government. Now he is a do-it-yourself investor and financial writer.

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