Forex

Do you remember when your parents told you not to touch the
stove when it’s hot? Probably not, but nonetheless, you do know
that if you touch it while it’s hot, you will get burned. You can
apply the same postulate to “hot” industries that create many IPOs.
During the late 1990s, many investors got burned buying hot
IPOs. For example, Goldman Sachs underwrote PALM, a company
that manufactures Palm Pilots, at $38 per share, and believe it or
not, no individual investor was able to get PALM at that price. On
that day alone, the stock closed at around $126 per share. A few
days later, a PALM share reached $165. Its market cap that day surpassed
General Motors. One year later PALM was trading at
around $7 a share. Do you really want to end up stuck with stocks

that have dropped in price 90 percent or more? This misfortune
befalls IPOs quite often.
You should try to remember a very simple dictum: As an individual
investor, your ability to make money in the IPO market is
very limited. Just look at the current fallout. There are hundreds of
lawsuits in addition to federal investigations into questionable IPO
practices by major financial institutions. The plaintiffs’ lawyers
estimate that there will be hundreds of IPOs that could become
subjects of lawsuits in the next year or so.

What is wrong with IPOs? The plaintiffs claim that brokerage
firms involved in IPO underwriting used a very simple strategy to
deceive investors. These investment banks allocated shares of the
companies they underwrote to their good customers such as mutual
funds, hedge funds, and so on. There is nothing wrong with that;
however, these so-called good customers had to agree to buy more
shares when these stocks began to trade. At the same time, they
were not allowed to sell these shares on the open market. Although
this alleged scheme works under an unwritten agreement rather
than a company policy where your stockbroker refuses to sell your
shares at your request, the result is the same, as artificially created
low supply and high demand drive share prices up. And with the
price so high and still climbing higher, less-experienced and lessinformed
investors flock to the feeding frenzy. Remember peer
pressure and herding mentality?
Unfortunately, many individual investors are often at least one
step behind. At this stage CNBC, CNNfn, and all the major newspapers
have blown their horns so loudly that even the dead have
heard about these stellar stocks. Everyone wants a piece of that pie
and is eager to pay $165 for PALM, $170 for Ariba, $130 for Ivillage,
and the list goes on. And now that the buying craze has hit its peak,
agreements with the good customers, the ones who promised not
to sell the IPO shares immediately, can be terminated, and they
begin to sell their shares on the open market. Needless to say, when
a large contingent of shareholders begins to sell, prices begin
to drop.
According to IPO.com there were 996 IPOs issued during 1999
and 2000. The reason these lawsuits have any legal merit is that
although it is not against the law to sell shares in hot IPOs to good
customers, it is against the law to have any attachments these
so-called good customers are obligated to fulfill. These agreements
to buy more shares on the open market after trading has begun are
illegal. All of these lawsuits are obviously expensive. Credit Suisse
First Boston in the first quarter of its financial statement released in
May 2001 states, “The results of such proceedings in the aggregate
will not have a material adverse effect on our financial condition
but might be material to operating results.”
These cases will most likely be settled out of court. However, for
our purposes the judgment should be issued right here and now.
All of us should be aware that it is costly and foolish to pay only
the minimum balance due on our credit card. We know that smoking
cigarettes is hazardous to our health. We know that excessive
drinking is not good for us either. Similarly, everyone should be
aware that IPOs are bad for our pocketbooks and, therefore, our
health. Remind yourself to stay away from IPOs unless you are one
of those “good customers,” which makes it a completely different
story.