Google your odds of success :: AO:
Google your odds of success
NewsTeam | CBS [MarketWatch] | POSTED: 01.14.04 @10:30
ANNANDALE, Va. (CBS.MW) -- Here's my advice for those of you who are waiting with bated breath for a possible Google IPO.
et's review all the things that must fall into place before you will make more money in a possible Google IPO than by investing instead in the Vanguard S&P 500 Index fund.
First, Google has to decide to actually go through with an IPO. This is not a sure bet by any means, even though the company has been quite coy about its intentions in this regard.
For argument's sake, let's put the odds of a Google IPO actually coming to market at 1 in 2.
Secondly, even if Google does decide to go public, your next challenge will be figuring out how to finagle yourself into that select group of investors who are allowed to purchase shares at the initial offering price.
To be sure, this may not be as hard as it used to be, now that New York Attorney General Eliot Spitzer has been shining his spotlight on how investment bankers allocate IPOs to their favored clients.
Nonetheless, given all the attention that already has been given to a possible Google IPO, and given that, if it comes to pass, it would be the event of the year in the new issues market, your chances of being able to buy the company at its initial offering price are extremely low.
For argument's sake, let's put those odds at 1 in a 1,000, even though some of the investment advisers I spoke with thought that even these odds are generous.
Thirdly, even if you have jumped over these first two hurdles, you still will face dismal odds. That's because the average IPO underperforms the market.
There are a number of ways of making this point, and I have written about some of them before. But for this column I want to focus on another statistic that I find particularly revealing.
It is the percentage of each calendar year's IPOs that, as of the Dec. 31 of that year, are trading below their initial offering prices. Ask the investor on the street, and he'd guess that this percentage is very low. After all, buying an IPO at its initial offering price is supposed to be the investment arena's closest thing to a lead-pipe cinch.
However, according to Jay Ritter, a professor of finance at the University of Florida, and one of academia's experts on the IPO market, about 1 in 2 IPOs end their first calendar year of life priced lower than their initial offering prices. Note furthermore that this statistic is not a function just of the 2000-2002 bear market. It also tended to be true during the late 1990s, well before the Internet bubble burst.
This is well illustrated in the graph below, which reports this statistic for each of the past eight calendar years. Take a look at calendar 1998, for example, a year in which the go-go era of the late 1990s was very much alive and well. That year saw well more than half of its IPOs finish the year lower than the prices at which they came to market.
Or take a look at calendar years 1996 and 1997, which also were very much bull market years. The percentages for those years were only slightly below the 8-year average of 43 percent.
For argument's sake, let's assume the future will be like the past eight years and the odds of being ahead of an index fund at the end of this year by buying a Google IPO are 57 out of 100.
Now that we have these three individual odds, we can multiply them together to come up one overall probability. The result: You have a 0.029 percent chance of beating an index fund this year in a Google IPO.
I'd give you higher odds that Pete Rose is really and truly sorry for betting on baseball.
The investment moral: Leave fantasies to others. Focus your investment energies on pursuits that have better odds of success.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
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