I have a very irrational reason (yes it is not a typo) for not investing in IPOs. My thinking is like this (A hypothetical tale)
I have a house and wish to sell it. Also I have a decent cash balance and I am no hurry to sell the house. I will sell the house if I can get a good price for it. Looking around I realise that my neighbour has just sold his house at a fantastic price. That tempts me into start looking for buyers and I approach a few brokers to test the market. The brokers are extremely bullish and tell me that this is a good time to sell and the market is hot !. I get all excited and invite a few brokers to come over and look at the house. A few brokers come over and have a look at the house. On inspecting the house, they notice a few problems in the house. The west side wall seems to be weak and roof needs repairing. They ask me to repair the roof and paint the walls so that the these ‘defects’ can be hidden. I go ahead and start the repairs and meanwhile the brokers are looking for buyers.
The broker meets the buyers and tells them that they have a great house on the market. The price for houses in that area have increased by 50% in the recent past and this house is a great deal. The buyer, all excited by the likely appreciation, comes over, looks at the house and agrees to buy it. A somewhat weak roof and wall goes un-noticed because the house is a great ‘investment’. Why bother checking!!
So the deal gets done and everyone is happy. I get a good price, the broker his commission and buyer gets the dream of price appreciation and hopes of profits in the future.
One year later, the RBI in all its wisdom raises the interest rates. The housing market starts slowing. Buyers are now more discerning. They are not buying to invest, but to stay. A house with a weak roof and wall is not a good place to stay. The buyer is finding it difficult to sell the house and has EMI to pay on top of that. Dejectedly he sells the house at a loss and resolves never to get sucked into such a scheme.
Ok, I am not an evil scheming guy :)
So now replace me with company, broker with merchant banker, buyer with investor and house with a company and you would get the point.
If I have only X no. of hours in a week to analyse stocks, why waste time looking for needles in an IPO haystack when I can find them more easily in the rest of the market (with full knowledge of all the problems and leaky roof !!)