From William Bernstein's Efficient Frontier:*
I generally don't comment on initial public offerings; there are some neighborhoods in town I consider it wise to avoid, and when it comes to investments, this is certainly one of them. The classic 1991 study on the subject by Jay Ritter in Journal of Finance, for example, showed that initial public offerings (IPOs) produced a first-day pop of 16%, then underperformed the market by an average of 28% over the next three years. From the perspective of the first-day return, the average IPO is "underpriced," designed as a bon-bon to preferred brokerage customers. The "success" of the IPO is thus defined by the profit provided to these initial purchasers, who are favored by the wirehouses in the same way that casinos favor the highest rollers. That the issuing company and the later purchasers do not come out so well doesn't seem to enter into this rather perverse calculus of success. But don't feel too sorry for issuing corporations, they are past-masters at cranking out expensive shares when the markets are frothy (not only as initial offerings, but also as seasoned ones) and issuing debt when markets are cheap. In fact, if you've ever wondered just who is taking the opposite side of the average mutual fund investor on the wrong end of the dollar-weighted/time-weighted gap, the answer seems to be corporate CFOs. Several things struck me about the tsunami of media attention over the "failed" Facebook IPO. The first was the discovery by participants that instead of being able to quickly flip their purchase to a second-day patsy, they were the patsies (at least after one week). But even more remarkable was the inappropriate application of the term "investor" to Facebook's unhappy purchasers....MORE
*We are fans.
From our 2010 post "Berkshire May Be Required To Post Up To $8 Billion In Collateral" (BRK.A; BRK.B)"':
I think it was Boston University's Zvi Bodie* who, shrugging off the restraints of his MIT PhD, pointed out to the "expected return" crowd that if it were true that the risk of negative returns decreases as the time frame increases, the cost of long-term puts should decrease the farther out you go.
Kind of an Emperor has no clothes thing to say.
I'm referring, of course to the equity index puts that Mr. Buffett sold....
...*William Bernstein (No slouch either, M.D. Neurologist, PhD. Chemistry, dabbler in Modern Portfolio Theory, Bestselling Author, etc.) in one of his Efficient Frontier pieces, "Zvi Bodie and the Keynes’ Paradox of Thrift" described the professor as "Academician, raconteur, and all-around good guy Zvi Bodie...".
Then he rips his lungs out. Very typical in the academy:...MORE