Government got Gold with Coal India’s IPO last month…It was a Win Win Situation all around…as Issue Size was huge the Retail Segment was oversubscribed 2.3 times and also benefited from the rollover of the unsubscribed Employee Quota …so allotments were good…max 199 shares at Rs 245 less 5% discount
And Now we have the IPO of MOIL….attractive Pricing Band of Rs 340-Rs 375….However the Issue Size is Small and the Retail Segment will be oversubscribed 20 times…..therefore the allotment will not be generous
…Now a Retail Investor can apply upto Rs 2 lakhs…….Minimum application in MOIL is for 17 shares and in multiples of 17 thereafter…..On a max application of 527 shares in MOIL expect to be allotted just 25 shares…If Rs 375 is fixed as the issue Price then with a 5% discount the cost to Retail Investors will be Rs 356.25….Currently the Grey Market Premium is Rs 240…thus on allotment of 25 shares the profitability will be @ Rs 258.75 from Cost…that’s a Profit of @ Rs 6500…thats a 3.3% return in a month on a Application of Rs 197625….that’s very good and quite probable…infact fairly certain
…but consider this…Instead of Primary market IPO of MOIL,consider Secondary Market Investment of @ Rs 2 lakhs in 3400 Shares of IFCI @ Rs 59…IFCI has slipped sharply in this correction and is available at Book Value this year and is to apply for a Banking Licence….If it moves up by just Rs 3 to Rs 62 ,the gains will be Rs 10200…There is a strong probability that it may move up much higher in December but there is also a probability that it may drop even below Rs 59 !
So what would you choose ?…a certain smaller gain with little or no chance of any Loss or a bigger probable gain with some probability of loss too in December 2010 !
Loss Aversion Psychological Tests conducted by D Kahneman and A Twersky are quite revealing…They gave these Options to a Group to choose from
A : A sure gain of US $ 250
B : 25% chance of a Gain of US $ 1000 and 75% chance of no gain at all
84% of the Group opted for A over B ( with the same expected payout but much greater risk)
They then reframed the Question and asked the same group to chose from
C : A sure Loss of US $ 750
D : A 75% chance of losing US $ 1000 and a 25% chance of losing nothing at all
73% preferred the gamble (with an expected loss of US $ 750) over the certain loss and opted for D
Stating the Question in terms of Gains and then in terms of Loss resulted in different choices
Loss Aversion implies that Individuals will prefer an uncertain gamble to a certain loss as long as the gamble has the possibility of no loss even though the expected value of the uncertain loss is higher than the certain loss
So which would you choose to Invest in ?
A : In the Primary Market IPO of MOIL with a certain lower gain
B : In the Secondary Market in IFCI with a high probabilty of a higher gain but also with a probability of a loss
My Choice would be B…what would be yours ?
One could do B and hedge it with A too…If B wins out in December it will be a Win Win situation all around
Making Choices in Equity is surely great Fun !