Hello there! Graham here. Huge thanks to Paul for doing the entire SCVR effort by himself for the last couple of weeks.

This is our placeholder, published the night before, so that comments and suggestions can be made both now and first thing on Monday morning.

Best wishes


Comment on IPOs

I recently answered some interview questions on IPOs, where I tried to explain my perspective on them. Since then, I've been wondering whether my answers, and indeed my thinking on them, were sufficiently clear. This also follows up on Paul's recent comments/questions on the IPO landscape, after a couple of deals were cancelled at the last minute.

In a nutshell, I do follow IPOs. I think they're an important part of the financial landscape. They're a key indicator of the temperature of investor sentiment. They also tell us something about business and sector conditions, since most companies would prefer to float when they are doing well rather than when they are doing badly (or at least when prospects look good rather than when prospects look poor).

Do I invest in IPOs? Generally speaking, no. Most traditional value investors will warn you not to take part in a transaction (as a buyer) which has been heavily marketed and which takes place at the time of choosing of the vendor, as is the case with the typical IPO.

For the risk-averse investor, it makes sense to avoid IPOs, since by definition the company (and usually also the management team) lack a public track record with which to judge their past behaviour. But for every year that goes by without mishap following IPO, we can trust the management and the company that little bit more. I've also seen good statistical evidence to the effect that older stocks generally outperform newer ones.

For the more enterprising investor, however, it does make sense to focus some attention on IPOs. This is the more difficult task, but potentially a very lucrative one, of finding the diamond in the rough. For an example of someone who does this in a US context, I recommend Ian Cassell of MicroCapClub.

A fellow investor recently explained this to me with a brilliant analogy. From his horse-racing background, he explained that it was much easier to gain an edge against the bookies with respect to young horses with a…

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