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Beware of initial public offerings
Overpromising and underdelivering is common with IPOs, writes Robert Laing, who illustrates how risky it is to fall into the trap of getting in too early
It is a painful lesson for many novice investors that IPO usually stands for "it’s probably overpriced". The resale value of brand-new shares is similar to that of brand-new cars, where the "newness" inflates the price by at least a third, which vanishes as soon as you leave the showroom. Buying shares at their stock market debut is usually a bad idea, but it is important to track the frequency of IPOs and the quality of the companies going public to keep track of which part of the boom-and-bust cycle you find yourself in. The recent history of the JSE’s property sector illustrates that when the IPO merry-go-round starts swinging too wildly, with new companies without track records listing fast and furiously, there are tears on the way. "Somewhere in the middle of the bull market the first flotations make their appearance. These are priced not unattractively, and some large profits are made by the buyers of the early issues," Benjamin Graham wrote in his classic book The Intelligent...
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