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,"
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"
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.
Submitted by GrahamValue. Created on Sunday 10th April 2016. Updated on Wednesday 19th January 2022.