Don't expect quick profit on medibank float


Published in the Daily Telegraph, December 2014 by Dale Gillham

Medibank Private investors who have handed over their hard earned cash are more likely to lose than win over the coming year.

Despite all the celebrations about the success of the Medibank Private float by the Australian government, to me the only winners in the next 12 months will be the brokers who sold the shares and the government, who raised more than $5 billion from it.

In the short term the prognosis for investors is not good, as the share price opened at around $2.22 before falling by around 6 per cent, and in my opinion it is likely to move lower. So, if you bought Medibank, what do you do?

Statistics don't lie and even government floats are likely to fall below their issue price in the first 12 months, therefore don't expect a miracle for your Medibank share price. Highprofile floats like Medibank are surrounded by a lot of marketing hype and inevitably investors end up paying too much. When the market realises this we see the share price fall, which is occurring now.

That said, with the exception of Telstra, government floats generally tend to fare well over the longer term.

While your intention may be to hold Medibank Private for the long term, emotionally you may not be prepared for when the shares are trading at a loss in the short term. Even those who set out to buy and hold long-term can panic.

These big floats show how herd mentality works, and when the herd runs, your risk dramatically increases.

Here's how to manage your Medibank shares:

  1. I suggest you invest no more than 10 per cent of your total portfolio value in any one share. If you didn't get your full allocation you may pick up the rest in six to 12 months when the market has had an opportunity to set the price.
  2. If the price is trading above what you paid you could sell some to bank a profit.
  3. Set a stop loss, being the maximum amount you are willing to lose in the event that the shares fall below your purchase price. I suggest a stop loss of around 15 per cent, which at a $2.00 purchase price is $1.70.

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