Value Investing and Initial Public Offerings

內容

Both Warren Buffett and his mentor — Benjamin Graham — advise caution when investing in a New Issue (or IPO).

Buffett

In a May 2019 interview with CNBC, Warren Buffett said:

"In 54 years, I don't think Berkshire has ever bought a new issue... The idea of saying the best place in the world I could put my money is something where all the selling incentives are there, commissions are higher, the animal spirits are rising, that that's going to better than 1,000 other things I could buy where there is no similar enthusiasm... just doesn't make any sense,"

Warren Buffett, CNBC (2019).

Graham

What Buffett said is nearly identical to what Benjamin Graham — Buffett's mentor — wrote in his book, The Intelligent Investor.

Graham, the founder of Value Investing, gave the following straightforward recommendations on New Issues or IPOs.

"Our one recommendation is that all investors should be wary of new issues—which means, simply, that these should be subjected to careful examination and unusually severe tests before they are purchased. There are two reasons for this double caveat. The first is that new issues have special salesmanship behind them, which calls therefore for a special degree of sales resistance. The second is that most new issues are sold under “favorable market conditions”— which means favorable for the seller and consequently less favorable for the buyer"

Benjamin Graham, Chapter 8: Portfolio Policy for the Enterprising Investor: Negative Approach, The Intelligent Investor.

GrahamValue

GrahamValue strictly follows Graham's framework for stock selection. GrahamValue's automated analyses cover Graham's entire framework, and will also give an optimum Graham price for a listed stock where possible.

There are a lot of inter-related numbers in finance. Graham's framework is restricted to the most essential ones, each of which is independent of the others and equally important in evaluating a stock. Graham spent nearly 50 years narrowing down to the most essential numbers required to evaluate a stock, as attested to by the success of Warren Buffett and his other students.

At any rate, newly listed stocks are unlikely to clear any set of Graham's rules. The premium Graham Grades require several years of demonstrated performance. Even the NCAV grade, Graham's least restrictive grade, requires an EPS (TTM) at a minimum.

Videos

Buffett Says

Warren Buffett explains how he's never bought an IPO in his entire career, which is in keeping with his mentor's principles.

Overvaluation

A good explanation by the Wall Street Journal on how private valuations tend to be prone to exaggeration.

連結
https://www.grahamvalue.com/blog/value-investing-and-initial-public-offerings
總結
Warren Buffett and his mentor, Benjamin Graham, both caution against investing in new issues or IPOs. In a 2019 CNBC interview, Buffett stated that Berkshire Hathaway has never purchased a new issue, arguing that the selling incentives and market enthusiasm surrounding IPOs do not justify their investment potential compared to other options. Similarly, Graham, in his book 'The Intelligent Investor,' advised investors to be wary of new issues, emphasizing the need for careful examination due to the aggressive sales tactics often employed and the favorable market conditions that benefit sellers more than buyers. Graham's investment philosophy, which Buffett follows, focuses on essential financial metrics for stock evaluation, suggesting that newly listed stocks typically do not meet his stringent criteria. The automated analyses provided by GrahamValue adhere to this framework, indicating that new stocks are unlikely to pass Graham's rigorous standards, which require several years of performance data. Overall, both Buffett and Graham advocate for a cautious approach to IPOs, highlighting the risks associated with them in the investment landscape.