The worst bet in the stock markets

Fri, 17 Sep Pre-Open

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In the stock market, there's only one thing as difficult as stock picking. And that is tracking the precise performance of your overall portfolio over the years. That's because your numerous buy sell decisions that take place at different times. Further, most people add and subtract from the total funds invested in the markets at various times along the way. In light of all this tracking, the final performance of your various investing decisions over a long period of time can be an arduous task.

That's where the various indices compiled by stock exchanges do a fabulous job. They provide a ready reckoner to gauge how the various pockets of the markets have performed over any given time period.

For some time though, what was missing was a systematic tabulation of how investments in initial public offerings (IPOs) were performing. The Bombay Stock Exchange (BSE) filled up this lacuna in 2009 when it launched the ‘BSE IPO Index'. The index tracks the value of companies within a period of two years after listing of a company subsequent to the completion of its IPO. Further, the index's starting date has been taken as the 3rd of May, 2004. From this date, the index was started with a base of 1,000.

With the convenience of the BSE IPO Index, we decided to track just how much IPOs in general have added to the wealth of the investing community. We did this over a period of a little under six and a half years (from the IPO index's starting year). And the results were as follows –

Performance of the IPO index

	BSE IPO	BSE Mid-Cap	BSE Sensex	BSE Small-Cap
3-May-04	1,000	2,181	5,585	2,013
15-Sep-10	2,326	8,068	19,502	10,186
Annual Returns	14%	23%	22%	29%

Data Source: CMIE Prowess, BSE
As can be seen from the above table, the BSE IPO has severely underperformed all the other major stock indices. It turned in an annual compounded return of about 14%, a far cry from all the other indices. This compares to a 23% annual return for the BSE Midcap, 22% for the BSE Sensex and a 29% for the BSE Smallcap. All in all, such a difference in performance over a period as long as six years can add up to a meaningful amount.

A flurry of IPOs are on the way to the market. With the way stocks have been going up lately, and the generous valuations that many of them are trading at, expect many more promoters to come knocking on your door in the months to come. Expect some generous marketing and promotional pitches. And a lineup of enthusiastic merchant bankers trying their best to woo the investor community. Not to forget the brokerages, who would be all too happy to make a quick commission.

This bombardment will continue as long as the overall markets remain high. Your best defence against this would be the knowledge that the odds are stacked against the investor when it comes to investing in IPOs. Their strategic pricing leaves little on the table for investors. We hope the above cited table does enough to convince you of this fact.