IPO - Inital Public Offerings - new issues - just don't do it

Quite simply, I do not buy IPOs because all these people, whose judgement I respect, say not to buy new issues. Tom Connolly

“Typically, you should avoid new issues…” Stephen Jarislowsky's The Investment Zoo p.84 Also read the Zoo page 78.

“Our recommendation is that all investors should be wary of new issues…” The Intellegent Investor p.68 by B. Graham

One of the major reasons for the underperformance of IPOs is that they are growth stocks, often issued at huge price earnings multipliers.“ p.93 Stocks for the Long Run by Jeremy Siegel (Irwin)

“initial public offerings tend to occur at the peak of industry-specific investor fads and then show gradual but substantial price declines relative to the market over the subsequent three years” p 180 Irrational Exuberance, R. Shiller

“IPOs all too often stack the deck in favour of big institutional customers of the underwriters.” Barron's May 26 2012

“Investors even remotely tempted to buy new issues must ask themselves how they could possibly fare well when a savvy issuer and a greedy underwriter are on the opposite side of every underwriting. Indeed, how attractive could any security underwriting ever be when the issuer and underwriter have superior information as well as control over the timing, pricing, and stock or bond allocation? The deck is almost always stacked against the buyers.” Seth Klarman, Margin of Safety p.22

“A third incentive drives the investment bankers who do the underwriting. The fees they receive from a successful IPO, around 7 percent, dwarf their payouts on other transactions. The brokers who get to distribute (sell) the offering to their clients are pushing for IPOs, as are those large investors who are able to get first crack at hot issues and can often buy and sell them during the first day for exorbitant returns.” Value Investing from Graham to Buffett and Beyond p.280 Greenwald et al.

”[A]s demand for dotcom and technology IPOs soared in the late 1990s, things got worse. By pricing IPOs low, they gave away millions of dollars in the form of “pops'- a big rise in the first day's share price. That led to kickbacks in all but name. institutional shareholders and corporate bosses were plied with IPO allocations in return for inflated commissions and future favours. The losers were investors who bought the shares unaware of such shenanigans…” The Economist May 8th 2004

“For most IPOs, the [investment] banks' fee is 7% of the money raised” David Dreman has over ten pages on IPOs in his 1998 Contrarian Investment Strategies: The Next Generation. Here's just one sentence: “People wear blinders against the enormous risks IPOs represent.” p.362

In December 1985, Forbes did a cover story entitled “Why New Issues are Lousy Investments”

“value is not likely to exist in what the herd is buying” Seth Karlman, Margin of Safety, p.155

“When do you go public? You go public when IPOs [initial public offerings] are hot. When is that? What the stock market is hot…” Jeremy Grantham (founder of Boston-based GMO, which manages $115 billion) Barron's February 6 2006

Hydro One IPO - [which never was offered] I'm not interested for 13 reasons. (Revised April 26, 2002) I do not expect any dividend growth. That's the primary reason I'm not even thinking of the Hydro One initial public offering. The Report on Business headline of March 29th put it succinctly: “Hydro One plans aggressive growth”. Eleanor Clithroe, the CEO, seems to be a growth-type manager. Such people consider dividends a drag. They will be forced to pay one initially, but they won't grow the dividend. Here are another dozen reasons if you need to counter a determined broker pushing the stock. There's no record of dividend payments. It's an IPO. Retail brokers are pushing HYO. Instalments receipts (60% down) make me dubious. There are better alternatives. I already own good electrical utility stocks. Profit was flat last year. Growth stocks are riskier. Politics is involved. HYO still has $4.5 billion of debt. The sales document says, “we expect to incur significant amounts of debt”. Moody's have put this transmission company's long term debt under review

The entire Tim Horton IPO could value the chain at $4 billion. In 2005, revenues were $1.2 billion up 19% compared to 2004, according to chairman Schuessler. Investors will be excited. The IPO price could be in the high end of $29 to $36. What's really going on? Private-equity investors and hedge funds will sell the Horton shares they receive as Wendy's shareholders to the public. Demand will be pepped. Do you think these professionals will want cash out at a high price, or at a low price? It's all about greed, not the nice Dr. Zeus story about kind 'Horton Hears a Who'

• “Investors find IPO market full of land mines” was the title of a Report on Business column on March 23 2010. The sub-titles was: “In Canada, high profile disasters overwhelm small number of success stories” Enough said.