Is the Bond listing gains game over?

by Manshu on March 8, 2012

in Opinion

A few years ago – IPOs were very fashionable and one way to make a sure profit was to invest in IPOs and then sell them on the first day. Then the Reliance Power IPO happened, a lot of people burned their fingers and the IPO listing gains game lost all its fizz. These days it is more common for IPOs to list at a discount than at a premium.

All the bond issues that have been coming in the last one year or so have created a small listing gains market for bond issues as well and I’ve lamented this ever since I read about the gray market premium build up for the SBI bond issue. That was the issue where investors made about Rs. 320 per Rs. 10,000 and were happy to report that they had made annualized returns of 76%!

At that time I wrote that it is ridiculous to say that you made annualized returns of 76% because there is no way to execute many of these type of transactions in a year and it is inevitable that you make some losses or don’t make enough profit. It’s just a one time hit – two times if you’re lucky, but then luck will run out.

It didn’t take very long for that outcome to unfold as the IIIFL and then the Mannapuram NCD listed at a discount, and you didn’t need any kind of special foresight to see that this will happen. Now, here I don’t mean that you would be able to predict which issue will list at a discount but rather know that in a string of such issues one or two are going to list at a discount and then wipe off all your earlier gains just like the stock IPOs.

I was reminded of this yesterday when Shiv left a comment about the lacklustre performance of the IRFC bonds that listed on Friday. Here are his comments.

Shiv Kukreja March 6, 2012 at 9:36 pm [edit]

Hi Amlan

The notification is yet to show up on the I-T Department’s website. It is Notification No. 13, dated March 6th, 2012 and it’ll appear on the below pasted link whenever I-T dept. uploads it:

http://law.incometaxindia.gov.in/DIT/Notifications.aspx#

Official first day figures are not out yet but the Retail response has been subdued due to a poor listing of IRFC Bonds. People who took financing for the IRFC issue have given more to their financiers and brokers than their actual profits post listing. The dreams they were shown by their brokers have not materialized and they are still selling their holdings in the secondary markets.

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Manshu March 6, 2012 at 11:39 pm [edit]

When did IRFC list and did it list at a discount? I seem to have missed this. Thanks!

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Shiv Kukreja March 7, 2012 at 9:59 am [edit]

IRFC bonds got listed on friday, March 2nd and no they did not list at a discount but a very marginal premium of Rs. 10 odd. Closing price yday was Rs. 1005.08. Actually, after the success of NHAI bonds, many retail investors were made to invest in IRFC bonds via financing route. They were shown profits of Rs. 10000-15000 on listing. They paid Rs. 3000-5000 in financing for a Rs. 5 lakh application but the listing gains barely covered financing cost and brokerage. That is the reason many of them are not very keen on investing in REC bonds.

 

I think this serves as a good reminder to people who are looking to make quick bucks and feel like they can borrow money for a short while and flip an investment for a sure profit. This type of thing works only until it stops working and I believe that the only way to win these type of games is to avoid playing them.

{ 29 comments… read them below or add one }

bemoneyaware March 8, 2012 at 8:47 am

Great post. Sooner or later the sanity returns or true picture emerges or fad dies out. Everyone wants to make the quick buck and some of them fall for these investment fads something similar to fashion or new weight loss diet. Sometime back people were buying silver then moved to gold.
These investment fads like fashion will come and go. I am reminded of Warren Buffet thoughts on Speculation and investing
The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.

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Raja March 8, 2012 at 9:43 am

bemoneyaware,

Such a lovely sentence you have quoted, had read it before… but every time i read it again it seems to make more and more sense 🙂 That’s the beauty of Mr. Buffet.

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Manshu March 9, 2012 at 5:00 am

Excellent quote of course and that reminds me that I don’t have a post on his 2011 letter which had quite a few wonderful concepts. Let me see if I can write something now.

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Raja March 8, 2012 at 8:54 am

Very well said Manshu. I guess lot of common people get initiated into the stock market like this. The lure of a sure looking profit in a very short span of time. The lure of looking at shares which gained the most in day. 5%-10% gainers on a day flashed on so many sites etc look very attractive. Only thing is one get’s to know about them after it has already happened.

I too started like that 😉 IPO’s, day’s high stocks etc and of course RPower IPO on my account and a friends account too :)… thankfully better sense has prevailed, over last 2-3 years. Now IPO’s, listing gains possibility doesn’t even get my passing attention. In fact anything which sounds too good to be true, most possibly is and a case for saying pass.

Read history , read history , read history is the mantra 🙂

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Manshu March 9, 2012 at 4:57 am

Ah so you are also a RPower club member! I thought you were always a value investor! But I guess that’s not possible, the lure of trading gets to everyone at one point or the other.

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Raja March 9, 2012 at 8:24 am

I was a toddler into investing world that time 🙂

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Raja March 9, 2012 at 9:39 am

Rather it will be more appropriate to say that i didn’t know the difference between trading and value investing at that time. For me investing was about buying and selling. no process before that and in between 🙂 Finding few value investor’s blog (read all their archives) and then reading plenty of books about value investing (almost as if, my life depends on it) have helped me improve my thought process.
Now it has made me a voracious reader ! and that’s the biggest plus as per me from this value investing virus.

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Manshu March 10, 2012 at 6:45 am

One thing that bemuses me is how some people lose money in the market and introspect to see what they did wrong and then discover something that makes sense to them and makes them money in the long term but a large majority get disgusted by it, blame the market, dump their stocks and continue blaming the market for their wrong behavior for the rest of their life.

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Vimal Raj March 8, 2012 at 9:20 am

Hi Manshu,

On last Tuesday, there was one article in LiveMint about the IPOs, FPOs (http://epaper.livemint.com/ArticleImage.aspx?article=06_03_2012_010_001&mode=1).

Now I can relate your post with that article and see how the bond market and IPOs are.

Thanks for the post.

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Manshu March 9, 2012 at 4:55 am

You’re welcome – I’ve been writing about this for quite some time now and having witnessed the peaks and troughs of the IPO market hope that bond investors don’t burn their fingers like this.

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RAKESH KUMAR JAIN March 8, 2012 at 10:47 am

A quick query. Can bond price go down compared to original price. For example, REC bonds have been offered at a price Rs. 1000/- bond, so its price go below Rs. 1000/-. Why I am interested in these bonds (and already applied for these) is annual tax free interest. Now, after reading this post, I am worried about my investment. Kindly comment.

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Manshu March 9, 2012 at 4:54 am

Yes, in the stock market it can go down below the issue price, but if you redeem them with REC after the end of the tenure then you will get the face value.

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Ramesh March 8, 2012 at 1:16 pm

If your an investor, enjoy your tax free interest and get your principal 1000/- back at the end of tenure.Simple. But if you are a speculator, sell your bonds at the current price and loose some money if the price is below 1000 or profit if the price is higher. Or simply wait for the price to rise and then sell. In these cases, you donot get the benefit of tax free interest, I am no expert in finance but this is what I understand.

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Manshu March 9, 2012 at 4:53 am

Simple to understand, hard to execute especially at a loss 🙂

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RAKESH KUMAR JAIN March 8, 2012 at 1:41 pm

Thanks. Can you please suggest, how can I monitor the price of REC bonds. I hope there is no lock-in period for these bonds. I admit that I did not read the prospectus before investing. My mistake. In fact I invested only for interest free interest & never thought of price going up or down.

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Shiv Kukreja March 8, 2012 at 5:58 pm

Hi Manshu… A few questions from the Retail Investors’ side… What should they do to beat High Inflation, earn a little bit extra on the money lying in the Savings Bank A/cs. or FDs, How to test the waters of the Investment World, How to become Financial Savvy if not to do stuff like running after these listing gains or extra income, How to avoid these greedy brokers & agents and How to avoid paying anything to an honest financial advisor ??

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Manshu March 9, 2012 at 4:45 am

I guess getting a pass-back from your insurance agent feels a lot better than having to pay a financial adviser.

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Shiv Kukreja March 9, 2012 at 12:59 pm

🙂 :-)… ya it does… & then cry about it that the agent sold us a wrong product, we paid Rs. 2.5 lakhs in the last 5 years and the current value is below Rs. 2 lakhs even after 5 years… 🙂

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Manshu March 10, 2012 at 6:41 am

What’s life without a few ups and downs 🙂

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Shiv Kukreja March 8, 2012 at 6:08 pm

Want to add this line:

“I deal in facts, not forecasting the future. That’s crystal ball stuff. That doesn’t work..” – Peter Lynch

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Manshu March 9, 2012 at 4:37 am

Lynch’s book is one of my favorite investing books.

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Shiv Kukreja March 8, 2012 at 6:11 pm

Also, MCX shares are going to list on BSE tomorrow, lets see how this one lists… another listing gains topic, hehe.. 😉

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Manshu March 9, 2012 at 4:36 am

Ah some more drama coming up tomorrow then, what was the oversubscription in that like? Did people get Rs.10,000 worth of shares or no?

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Shiv Kukreja March 9, 2012 at 10:13 am

Retail Category oversubscription was 24 times and a maximum of 9 shares got allotted to retail investors against one application.

Also, MCX listing has happened on both BSE as well as NSE. It has listed at Rs. 1408 against the issue price of Rs. 1032, touched a high of Rs. 1428.55, a low of Rs. 1358.75 and trading at Rs. 1366. I think it is a good co. to hold shares of for a long term.

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Manshu March 10, 2012 at 6:43 am

That’s great to know – thanks Shiv.

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RAKESH KUMAR JAIN March 9, 2012 at 8:37 am

Sorry for asking this question once again. How can I monitor REC Bonds (how much
has been applied for) and later on price of the bond in market?

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Manshu March 10, 2012 at 6:46 am

Sorry for not replying earlier, when they list you will be able to see it in any website that shows stock prices like bseindia.com or on your online broker’s site as well.

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RAKESH KUMAR JAIN March 10, 2012 at 9:50 am

thanks.

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Sreedhar March 11, 2012 at 12:43 am

Oppurtinity knocks only a few times.The early bird gets the worm.Those who had spotted the potential of NHAI made very good money , a cool 6 percent including the commission,Interest listing gains etc.Once people spot the trend they follow like sheep and get massacred(People went for financing to make profit and now selling their maal cheap) Simple example is the difference between 10 & 15 yrs IRFC Coupon rates.Since almost all people have applied for IRFC 15 years bond it is quoting at much lower rate than the 10 yr one .In reality the 10 yr coupon should quote less .The only reason is selling pressure seen in 15 yr coupon

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