Should I buy the Alibaba IPO?

Should I buy the Alibaba IPO?

10/22/2014 - 12:46 PM
Buy the Alibaba IPO

The largest IPO in the history of the market is coming.  Alibaba, a Chinese company, is set to go public on the U.S. exchange.  The transaction will break all volume and valuation records.  Alibaba is a combination of Google, eBay and Amazon, and dominates the Chinese market.

The question is, should you jump on the bandwagon and buy the Alibaba IPO?  I say no way.  Here’s why… all without citing one number, statistic, or ratio.

I believe you should buy what you know.  I also suggest you buy only where and when you have an advantage.  I bet that most of my readers have no advantage in the Alibaba IPO.  Therefore, none of you should buy the Alibaba IPO.

First, let’s talk about buying what you know.  Do you have any special or unique knowledge about Alibaba?  Do you have a better understanding of their products, financials and future than the other buyers, sellers, or those going short?  I suspect not.  When an IPO is as hyped as Alibaba, no average investor has a chance of standing out from the crowd.

More interesting is to buy only when you have an advantage.  I assume you’re not a founder of Alibaba.  Therefore, the only advantage you might have is being issued some of the original IPO stock.

If your broker gives you an opportunity to buy Alibaba at its issue price, by all means, jump on it!  Based on similar IPOs, such as Google, you’ll receive a 10% premium/returns.  (Oops, sorry about that.  A percentage snuck in to this post).

But, will you get any of the original issuance?  Probably not.  Big time IPOs are taken up by the brokerage firms.  They allow only their best (read, highest commission paying) clients to buy the stock and then flip it to the rest of us.  Unless you’ve been paying in to your brokerage firm’s coffers for years, you aren’t going to see a single share of original issue IPO stock from Alibaba.  Me and my e*trade account won’t even get a sniff.

And that gets me to buy where you know.  I assume you have not been living in China and don’t have a solid understanding of the market, culture, and business opportunities in that market.  Because you have no experience in China, you shouldn’t be investing in China.  If you have no competitive advantage, you’re just following the sheep and hoping for the scraps that the pros have left.

It’s this idea of buying where you know that drives all of my investments.  I’ve spent years in South and Central America, and have a good understanding of small pockets of a few cities in these regions.  Particularly, I have found deals in Panama City, Panama; Ambergris Cape, Belize; Santiago, Chile; Quito, Ecuador; and Medellin, Colombia.

Don’t get me wrong.  I am not saying that all of these cities offer deals.  I am suggesting that local knowledge will allow you to find deals in certain communities within these cities.

You may find your way in a different part of the world.  Maybe Puket, Thailand or somewhere in the Philippines will speak to you.  No matter where you search out your opportunity, we will all share one important component:  We will be investing where we know, which is usually an area we enjoy.  A place where we are happy to spend the time to learn the nuances and culture.

So, should you buy the Alibaba IPO?  Only if you have special knowledge or access to an original issue. Otherwise, focus your efforts in a niche outside of the United States that’s small enough for you to build relationships and learn the region.

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