Nothing Succeeds like Failure

So 2014 saw a total of 75 NFOs (New Fund Offers by Mutual Funds) compared to 18 in 2013.

In 2012, there were 8 and in 2011 there were 11 NFOs. Last we saw anywhere close to so many NFOs was 41 in 2008 and 48 in 2007. And incidentally many of these 75 NFOs are close-ended, touting ‘the benefits of long-term investing’, but the real reason is ‘increased fees when money is there for the taking’.

It is said that nothing succeeds like success. But in this case, it is better said that nothing succeeds like failure. The only question is whose success and whose failure? In the case of NFOs and IPOs, it is clear that it is the success of the issuer and the failure of the investor.

Every time there is excitement in the market, the number of NFOs increase. The mutual fund industry can be trusted to raise money at exactly the right time for themselves, and the wrong time for the investor. So they always succeed in increasing their profitability (and this time it is even better with locked-in close ended funds for the long term!), and reducing that of investors.

It is rather surprising that the IPOs haven’t followed or preceded. It is probably because the promoters are smarter. Perhaps they want to wait till they can raise it at even better valuations. Perhaps their advisers are asking them to hold back till it is pretty clear to everyone that ‘this IPO cannot be missed’.

Make no mistake about it – they will come, and they will come at valuations that promise ‘a once in a lifetime opportunity for long term growth’. And they will come when people who refuse to take them up will look like utter fools then – for a while atleast.

The types of companies, the nature of NFOs and the stories for long term growth change, but the essence is really the same. Money is raised when it is available. It cannot be raised when it should be (at least for the investor!), simply because it is not available at that time at those valuations.

Therefore, there is no other option. A new generation of entrepreneurs will get richer. A new generation of merchant bankers and fund raisers will succeed. And a new generation of NFO and IPO investors will perhaps fail. I don’t know if it will happen this year or two years from now or five years from now. But make no mistake – happen it will.

And the signs are starting. As an old cliche said, the more things change, the more they remain the same. Nothing succeeds like failure.

Ending with excerpts from a 1959 speech by the legendary Ben Graham, which most of us would do well to remember, especially in times like today.

Speculative Excesses in the Current Market

In this connection, I arrive finally at a “law” about human nature that cannot be repealed and it is unlikely to be modified to any great extent. This law says that people without experience or superior abilities may make a lot of money fast in the stock market, but most cannot keep what they make, and most of them will end up as net losers. (This is true even though the long-term trend of stock prices has been definitely upward.)

This is a particular application of a much wider natural law which may be stated simply as: “There is no such thing as a free lunch,” for those too young to remember, was offered in the good old days to patrons of the corner saloon.

The stock market has undoubtedly reached a stage where there are many people interested in free lunches. The extraordinary price levels of stock of rather new companies in the electronics and similar fields, the spate of new common-stock offerings of small enterprises at prices twenty five or more times their average earnings and three times their net worth (with immediate price advances upon issuance), the completely unwarranted price discrepancies indicate reckless elements in the present stock market picture which foretell serious trouble ahead, if past experience means anything at all.

Let me conclude with one of my favorite clichés – the French saying: “The more it changes the more it’s the same thing.” I have always thought this motto applied to the stock market better than anywhere else. Now the really important part of this proverb is the phrase “the more it changes.” The economic world has changed radically and it will change even more. Most people think now that the essential nature of the stock market has been undergoing a corresponding change. But if my cliché is sound – and a cliché’s only excuse, I suppose, is that it is sound – then the stock market will continue to be essentially what it always was in the past – a place where a big bull market is inevitably followed by a big bear market. In other words, a place where today’s free lunches are paid for doubly tomorrow. In the light of experience, I think the present level of the stock market is an extremely dangerous one.