Floats like a butterfly that stings

Published in the Daily Telegraph - April 2014 by Dale Gillham

A lot of talk around town is about the government’s plan to float or sell off Medibank. 

Now the sums are simple for the government as the Medibank float is anticipated to inject around $4bn into government coffers. But is buying into floats good for investors?  

History shows how floats often fall well short of investor expectations, particularly in the months after the fanfare has faded and yet, investors listen to the marketing hype of the big brokers underwriting  the next big float and continue to line up for a piece of the action.

Some investors buy into floats to avoid brokerage, however, months after the float the share price often traded at considerably less than they paid so how is this a saving?

  1. In my opinion floats are high risk investments compared to good quality shares with a track record:It is difficult to accurately assess the real price or demand for a company until the buyers and sellers have set the price in an open market following the float. The information provided is mainly marketing hype surrounded by some fundamental information and background on the company designed to get you to part with your money and so those pushing the float get paid.
  2. Statistics show how more than 50 per cent of all floats trade below their initial price 12 months after listing. Therefore picking the ones that will rise can be hit and miss.

  3. There are many examples on the share market of well-known companies, large and small, such as Telstra (especially T2), insurer NRMA, AMP, and even CBA that have fallen afterwards. This shows how waiting can save you time, money and lower your risk.

In assessing a float, I suggest you head straight for the financials and talk to someone who understands them before forming your own view, further don’t get swayed by the brand name of the company, and above all stay clear of analysts from brokering houses involved in the float.

If you are determined to buy into a float, then consider investing half now and half six to twelve months post the float. This may mean entering at a slightly higher price however you are less exposed to a company that is sold off post float.

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