I was watching Bloomberg news last week, and there was a Hong Kong fund manager, who was discussing the Chinese IPO market.
China has seen a whole host of IPOs recently, and many of those have scorched on listing. In fact, Chinese IPOs are getting so hot, in a period of a couple of weeks; a million trading accounts were opened!
Now, I know that there are a gazillion people in China, but a million trading accounts in two weeks?
All these IPOs have done well on listing, and the host asked the fund manager whether there was any risk of an IPO bubble. His answer was â€“ probably not for another 18 months.
I was struck by the simplicity and honesty of the answer. Most of the time, you see fund managers and analysts defending stocks when they are too high, and coming up with numbers to justify the high prices.
Here is a guy who came out straight and said, this is shaping up like a bubble, but will probably not burst for another 18 months, so you can have fun till then.
The hot IPO market, regardless of which country it is, is the best example of the greater fool theory playing out.
People donâ€™t care about how well the stock is going to do in the long run, if they can get their hands on it on the opening day. After that they just want a greater fool who is willing to buy that stock from them at a higher price.
This kind ofÂ thing works well; till it stops working. The trouble is that no one knows when it will stop working. If you donâ€™t play this lottery, you feel left out when others make money. If you play the lottery, you expose yourself to high priced IPOs.
Thatâ€™s pretty much the case with all bubbles and why we have them for centuries now. Iâ€™ve seen this movie and know how it ends, the trouble is â€“ I donâ€™t know when it ends.