Wealth is built over time. Don’t fall for the herd mentality, warns financial planner on mad rush for IPOs
Lenskart was in the news as it launched its IPO with social media abuzz over its eye-popping valuation. But looks like that’s hardly kept investors at bay. The issue was subscribed 28.26 times by the third day of bidding.
Another IPO, Groww, is also making waves as it was booked 57 percent on Day 1. While the market goes gaga over these IPOs, let’s take a step back to understand if IPOs are good investments for retail investors and how one must look at them before jumping in to subscribe.
Surya Bhatia, who is a Chartered Accountant and a Certified Financial Planner says, “It’s not about this (Lenskart) IPO per se. There are so many new IPOs which have come in the past and will come in the future too. What you need to understand is – does it make sense for you to take part in the same IPO or not? If you think it’s expensive, please don’t just go for it. But yes, it’s good to understand the maths and not have that FOMO (fear of missing out) effect.”
“Don’t follow the herd”
Whether it is a retail investor or someone who is from the HNI (high net worth individual) segment, it is important to understand the business of the company that you are considering before jumping in for their initial public offering (IPO). How do you see that business in the long term? “What really matters are your cash flows, how cash positive you are in the years to come,” explains Mr Bhatia. “Because we have seen many good businesses having a problem or suffer or even go down the ladder if you have a cash issue. So for me, cash is king. You have to really understand that. And yes, cash, along with the valuation which the company brings on the table is something which you need to really realise the importance of. So therefore, if you look at it, cash as well as valuation should drive (it) and how good that business model is in the long term. Don’t just follow the herd.”
“There is no shortcut. When someone turns rich overnight, it is…”
Mr Bhatia’s advice on building wealth comes with key caveats. “Wealth is built over a period of time.” For him, wealth is something that grows with compounding. Of course, there can be spikes and bursts that can happen with some investments, but generally speaking, there is no shortcut. “Anyone who turns rich overnight is either plain lucky or there is something wrong there. There is no third way, no shortcut,” he says. “I can assure you rapid growth may happen in one or few cases, but cannot be permanent. You have to build wealth over a long term and it’s a process. If you just think by buying into an IPO and turning your money and doubling your money or doing a 3x, 4x yes, it can happen. Sometimes you get good opportunities, but it doesn’t happen every time.”
“Wealth is built with compounding. It is not built with buying one particular stock or one particular IPO. Because what happens next? You put in an X amount of money in any XYZ IPO, then what? What next month, what after that? Wealth is to be built over generations, over a period. That is what I define as a process.”
(Lead Image: AI Generated)