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- Dec 16, 2019 - The One Chart You Should See Before Investing in Stocks in 2020
The One Chart You Should See Before Investing in Stocks in 2020 
Rahul Shah talks about the one important chart all investors should see before making a big investment in 2020.
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Rahul Shah co-head of research at Equitymaster is the editor of (Research Analyst), Editor, Microcap Millionaires, Exponential Profits, Double Income, Midcap Value Alert and Momentum Profits. Rahul has over 20 years of experience in financial markets as an analyst and editor. Rahul first joined Equitymaster as a Research Analyst, fresh out of university in 2003 but left shortly after to pursue his dream job with a Swiss investment bank. However, he quickly became disillusioned working for the 'financial establishment'. He learned first-hand the greedy stereotype of an investment banker is true and became uncomfortable working for a company that put profit above everything else. In 2006, Rahul re-joined Equitymas ter to serve honest, hardworking Indians like his father, who want to take control of their financial future - and not leave it in the hands of greedy money managers. Following the investment principles of Benjamin Graham (the bestselling author of The Intelligent Investor) and Warren Buffet (considered the world's greatest living investor), Rahul has recommended some of the biggest winners in Equitymaster's history.
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Niranjan Hanasoge
Dec 16, 2019This article is a good reminder of, quote-unquote, "how much our behaviour is driven by impulses and emotions."
However, you go on to say "All you had to do was apply for every IPO and book profits on listing." That's very misleading. You're incorrectly assuming that all IPOs list at a premium, and that all applicants receive allocations.
One doesn't need to be a premium subscriber to look at IPO subscription data (which is available for free online) and guess which IPOs will list at a premium and which will fail. It was obvious towards the close of their respective subscription periods that SWSOLAR and SPANDANA would underwhelm, Xelpmoc (2.64x retail portion) and MSTC (2.95x) were borderline, while the others with much larger oversubcriptions would gain on listing. (For the long-term, what you say about analyzing the fundamentals makes eminent sense.)
Getting an allotment in an oversubscribed IPO is literally a lottery. CSB Bank's retail portion was oversubscribed 44 times. Meaning, only about 1 out of 44 retail investors gets allotment. (In practice the ratio is a little different because of invalid and rejected applications, bids below cut-off, applications for multiple lots etc.) So, unless you've told your premium subscribers a sure-shot way of getting an allotment, 98% of them won't profit!
Retail portions of successful IPOs are getting oversubscribed like 49x (Ujjivan SFB), 44x (CSB Bank), 15x (IRCTC). Statistically, this means, on average, you have to apply to 49 IPOs like Ujjivan SEB (or 15 like IRCTC) to get one allotment! Compare that to 17 or so total IPOs in 2019, including some 4 that are still losing money!
If you apply to all the IPOs that come along, the only sure-shot allotments you'll get are, sadly, in the under-subscribed ones. These perform poorly on initial listing, and often never recover. On the other hand, if you go by fundamentals and analysts' recommendations, you'll avoid Spandana and Vishwaraj. You'd have made money on them, because you were sure to get allotment. They opened poorly, but eventually recovered. Even oversubscribed ones fail: Xelpmoc (2.64x retail portion), MSTC (2.95x).
Among the upcoming IPOs, I'll be applying to SBI Cards. I'm sure it will be oversubscribed and very successful. But will I get an allotment? Now if only there were a sure-shot way for that.