One Fool reckons it's best not to invest in companies when they first join the stock market.
Do you remember the flotation of Lastminute.com during the now-infamous boom in shares of anything vaguely internet-related? I certainly do, because I bought some -- even though the company doubled its asking price for the shares just days before the flotation.
Around the time, all sorts of internet companies were coming to market, selling their shares to the very willing public. And many turned their founders into instant gazillionaires.
But for the mug punters (sorry, investing public) nearly all of them turned to disaster, with people losing nearly all their money -- shares in some of them went on to lose around 99% of their share price, as it turned out that the former owners had trousered vast piles of investors' money for companies that were practically worthless.
My own hope to turn a quick profit through my expectation that there were "greater fools" who would buy my Lastminute.com shares from me at an even higher price came to nought as they quickly nose-dived.
That's a bit of an extreme example, but there are more recent ones. High street photo chain Jessops
(LSE: JSP)
floated in late 2004, for example, and I'd considered buying some. But look at their share price chart since then to see what a bum deal it would have been.
Obviously the dot com boom and bust and Jessops' troubles have different causes. (The former being a classic greed-fuelled boom, the latter being due to tough competition for high street commodity sellers and falling margins). But they have something in common, something that makes me add "Don't Buy at Flotation" to my list of investing rules.
When the directors of a private company bring that company to market and try to sell its shares to us, what is there overriding aim? Is it to provide us with bargain-priced shares that give us a better than average chance of making a profit? No, it most certainly isn't. It is to get the most money they possibly can for the current owners.
And that means that they will try to float the company when they think its perceived value is at a peak, not down in a trough. So they will try to sell when all of the news looks good and when business is booming, when future bad news (which they may or may not suspect is on the way) is far enough beyond the horizon. For the potential buyer (ie: us), the sellers are not our friends.
Sure, some flotations will go well for the investors -- small growing companies that are in need of cash to expand usually won't have quite the same power over their selling price. (There won't usually be an irrational boom going on.) So they will have to offer their shares at an attractive price. But for the most part, I reckon buying at flotation will lead to worse than average performance and is to be avoided.
And my Lastminute.com share certificate is still on my wall as a reminder of that lesson.
More: Don't Buy What You Know
