Pamper Yourself or Invest in Stocks?

An important question that haunts many a white-collared,  well-to-do, corporate executives is, "Pamper Yourself or Invest?". Everything is out there in the universe - Armani suits, TAG Heuer watches, luxury cruises, stocks, stock exchanges, share prices, stock news. Some are dry and boring like the stock news while others are alluring - the choice is solely ours!

Opportunities to Splurge

A leading economic news paper published a titbit that an airline has launched the world's most expensive, one-way, fare of US$ 38,000/- between New York and Mumbai.  The offering comprises of a bedroom, lounge & shower room.  The cabin comes with a double bed with designer linen, spacious shower, a 32 inch flat screen TV, double dining table, etc.  In comparison an economy class ticket on the same sector will cost under US$ 500.

This is a perfect example of the dilemma, "Pamper Yourself or Invest in Stocks?"

A sane and calm introspection will certainly help us realise that the aspirational offering of the airline is not only 76 times more expensive - with the money spent on a few hours of luxury one can create a significant value investment portfolio, that has the potential to grow into nearly US$ eight millions (the future value of investment calculated over a period 37 years, after inflation, based on the historical returns of 15% per annum yielded by Indian stock markets).

I see many bright youngsters  earning handsome salaries in software, retail, e-commerce and other such well paying sectors, and splurging on expensive clothes, eating out, discotheques, etc.

The consequences of buying unnecessary things could prove to be too costly in life.

Wisdom of Investing

On the contrary Warren Buffett, a successful value investor, even after figuring on the top three richest list, leads a frugal lifestyle.  He self drives an old car, flies economy class.  In short, he has mastered control over the urge to splurge.

Well, actually it is not a great sacrifice!  Those who realise the potential of returned generated by stock market today, and the power of compounding, will never spend on pampering themselves and certainly think many times before spending even a dollar.

When you realise that you can buy a handful of shares of a blue chip company for the price of a family meal in a neighbourhood restaurant, or no less than 100 shares of the same company, for the price of a family holiday, which can give you tax free dividend income and capital appreciation for the next hundred years, the choice becomes quite obvious and simple.

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Conclusion

I am not suggesting that one should not spend and enjoy life, but only emphasising that one should try to keep ones needs simple, control the urge to splurge and wisely invest in stocks and mutual funds to earn financial freedom and create significant wealth. It is beneficial to read stock news, learn about stocks, stock exchange, share prices and mutual funds.

Is it Good to Subscribe to the Upcoming IPO?

Investor Subscribing to IPO Online Platform of Stock Exchange

Recently a professional colleague asked me if it is good to subscribe to a certain upcoming IPO. He mentioned that he always keeps a close tab on the IPO calendar as IPO stocks have always fetched him handsome returns, and he eagerly looks forward to new IPOs.

My answer is an emphatic NO!

People may argue that many good issues have yielded handsome returns or gains on listing – meaning the shares traded on the stock exchange at a price over and above the IPO offer price. 

Listing Gain should not be the Reason for Investing

I don’t deny that it is possible for a particular issue to trade at a higher price, for a short time.  But again it is fundamental difference in approach between a trader and value investor.  The question is not about price.  It is about value.  The question is whether the share being offered for subscription is at or near its fair or intrinsic value?  What price to earnings (PE) multiple is it sold? Is it ten times or near about ten times the earnings per share (EPS)?  The answer invariably is a no.  

Mostly IPO Stocks are offered at not less than a PE of 20 and some times it may go as high as 40 times the earnings.  In simple language, a PE of 20 means it will take 20 years for the company to earn the investment back for the investor, and a multiple of 40 means forty years.  To complicate the matter further, PE and EPS refer only to earnings by the company and not by the investor.  

Considering that companies hardly distribute more than 25% of their earnings to shareholders as dividends, it will take four times more number of years for the investors to recover their own investment!  Whereas the simple fixed deposit with a bank will recover the investment in 10 years, in India, assuming an interest rate of 10% per annum.  Of course, we have considered only the earnings and dividends in this analysis and not price increase either on the back of growth in earnings or otherwise.

One can Buy IPO stock Much Cheaper on the Stock Market

Even if we go by traded price on the exchanges, history shows that in the medium to long term, mostly IPO shares loose their value significantly.  One could easily buy the same shares at less than half their issue price if not more, in a few years. 

Value – that is any potential for future price growth - is almost fully extracted by the IPO company and investors are left high and dry either with losses or minimal gains. Ironically, it is not different even in the case of government owned or public sector companies.  This sorry state of affairs may be attributable more to the merchant bankers and advisors to the issue rather than the companies or their promoters or managers.

In the Coal India IPO of the year 2010, the price was fixed at Rs.245 a share.  It was billed as India’s largest IPO.  The company raised over Rs.15,000/- crores ( Rs.150 billion). The issue was over subscribed by 15.28 times. 

For the financial year ended on 31^st March 2010, the company had declared earnings per (EPS) share of Rs.5.97 and book value of the share was Rs.14.67. 

It means that the shares were issued at a PE multiple of 41.03 times (245÷5.97) and a price to book multiple of 16.70 times.  Whereas, the prescribed limits in value investing, are just 10 times PE multiple and 1.5 times the book value.  This mean the fair value of the share in the IPO was not more than Rs.60.

Today (Friday, 6^th May 2016) the closing price of Coal India share was Rs.281.95.  The share is trading at a PE multiple of 14.81 times and a price to book value multiple of 4.41.  Assuming that the EPS has remained constant 1t Rs.5.97, applying this PE multiple you could have bought the same share in the open market at Rs.88.41.

Conclusion

In the light of the above discussion with example it becomes amply clear that my friend's contention of watching the IPO calendar as IPO stocks have always fetched him handsome returns, and he eagerly looks forward to new IPOs, does not hold good, The answer to the question, "Is it Good to Subscribe to the Upcoming IPO?" is a definite no.