Tuesday, February 23, 2016

Would Warren Buffett buy ever buy an IPO?

Initial Public Offerings are plagued by adverse selection:
The new-issue market...is ruled by controlling stockholders and corporations, who can usually select the timing of offerings or, if the market looks unfavorable, can avoid an offering altogether.  Understandably,these sellers are not going to offer any bargains...Indeed, ... selling shareholders are often motivated to unload only when they feel the market is overpaying. 
--Warren Buffett's Chairman's Letter, in Berkshire Hathaway Report, quoted in Jonathan Shayne and Larry Soderquist, Inefficiency in the Market for Initial Public Offerings, Vanderbilt Law Review, 1995.

In other words, controlling stockholders have private information that indicates the true value of the company.   They sell only when smaller shareholders are offering too much.

3 comments:

  1. Warren Buffett did not become a multi-billionaire by investing in IPO’s; he is a value investor, which means the securities he deems worthy of investment are those that are undervalued in price based on their intrinsic worth. When it comes to an IPO, usually the company is a fairly new company looking to go public as a source of capital for investment in growth. Young companies do not have enough history to determine how well the company has performed and whether the return on investment will be high enough to make the risk worthwhile. For Warren Buffett to be interested in investing, the company must be performing well and have at least a 10 year history, have high profit margins, and low debt levels. The company must also have a competitive advantage – something that sets its product(s) apart from the rest of the industry. Ultimately though, the company’s intrinsic value must be at least 25% higher than the company’s market capitalization. This value measurement is determined through analyzing earnings, revenues, and assets. A company’s intrinsic value should also be higher than its liquidation value.
    Investopedia Staff. (19 October 2015). Retrieved February 25, 2016 from http://www.investopedia.com/articles/01/071801.asp
    My answer is no, Warren Buffett would not be interested in buying an IPO!

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  2. I doubt it; I think Rmari explained it really beautifully. I personally love reading such articles since there is a lot to learn from and it gives us pretty good value as far performance in concern. I am trading with OctaFX broker, I get great help from there with their daily market news and analysis service, it’s easier to follow but is seriously effective, hence I don’t have to worry about anything at all and that always leads to serious benefits.

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  3. This posting brought up some interesting topics regarding IPO’s, adverse selection, and risk avoidance. It doesn’t surprise me that Warren Buffet does not participate in Initial Public Offerings due to several factors. IPOs are a clear example of adverse selection and they have been known to have wild swings in price after being released. Adverse selection is when one party in a transaction has more than the other. The organization releasing the IPO (sellers) have much more information than the buyers of the stock. This gives the sellers a significant advantage in the transaction and is exactly why Warren Buffet does not participate in them. Buffett focuses on organizations that are undervalued, have potential for above average returns, or that have a long history proven performance. In most cases, a firm releasing an IPO is looking to raise capital through the transaction and it is in the IPO’s best interest to make sure the timing and pricing are in their advantage. I still personally enjoy participating in IPO releases because of their unexpected returns.

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