Dear Friend,
The Zomato IPO opened this morning. And within 3 hours, it was oversubscribed a whopping 35 times. An oversubscription happens when the number of applications (demand) exceeds the the number of shares available for allocation (supply). Safe to say that everyone wants a piece of the company. The oversubscription also means that when the shares do get listed, prices will go further up - this spike is known as a “listing gain”. And there are a number of brokerage firms that have actually recommended subscribing to the IPO, only for the listing gains.
Hype, you fools
Every time there is hype around a stock, the markets in general, or any other asset for that matter, the greater fool theory kicks in. The greater fool theory states that investors will ignore the real value of the asset & buy it at inflated prices because there are other investors who will pay an even higher price. So investors will keep buying overvalued assets because they believe that they can find “a greater fool” who will take the asset off their hands and leave them with a profit. The game ends when the greater fool becomes the greatest fool. The bubble breaks, the correction begins and investors who bought into the story in its later chapters end up losing a lot of money.
Who is the greater fool?
Investors who are impatient, ignore fundamental research and get swayed by stocks that are popular/hyped/touted to be “the next big thing” are usually the ones end up becoming greater fools. Fear Of Missing Out plays a significant part in driving greater fool investing.
Playing the greater fool
There are some seasoned investors who actually use the greater fool theory as their guiding investing principle. They’re the mythical friends of friends who made a ton of money by entering when the markets just began to warm up, but managed to sell right before shit hit the fan. The ones who managed to snag the last chair just as the music stopped playing.
Using the greater fool theory as an investment strategy can be very tempting, but it is not for the faint hearted. It requires you to constantly pay attention to the markets and is not possible for anyone who wants a somewhat hands-off approach to investing. You could stand to lose everything if your timing isn’t right. Getting it right with one stock doesn’t mean you’ll get it right with every stock, either. And unless you’re an adrenaline junkie, playing the greater fool as an investing strategy is one of those risks that’s rarely worth the reward.
Uncharted Territory
If you’ve been disappointed at missing out on the Zomato IPO, don’t be. Wait it out. Ultimately, all stocks follow something called mean reversion. Mean reversion suggests that although the prices of stocks move up or down, they’ll only hover around their true or intrinsic value in the long run.
Zomato’s listing is uncharted territory for all of us. Some analysts are wary. Some others are bullish on its potential. There could be extraordinary investors who make extraordinary money or there could be greater fools caught with greater losses. No one really knows what will happen in the initial days…but what we do know is that ultimately, its price will only hover around its true value. And that’s enough reason to be patient. After all, if you want to see clearly, you need let the dust settle.
Thank you for reading! I hope you found this useful. I will write to you next week. In the mean time, please do check out Pennmoney for other money related posts.
Best,
Lavanya