I wanted to comment on posts on investing in Initial Public Offerings, Mortgage-Backed Securities and Emerging markets that were recently featured in some of the blogs that I follow.
Canadian Money Blogs Reviewer wrote a post on how you can profit from IPOs by buying them without paying a commission and selling them in a few weeks when the volume picks up. Unfortunately, it is not so easy. Most IPOs are stinkers like Vonage Holdings (VG) and profitable offerings like Google (GOOG) are the exception rather than the rule. There is evidence that investors can make money on the first day of an IPO but small investors cannot get in on the popular IPOs and if you can get in on an IPO, you probably don’t want it! Verdict: Avoid.
Preet featured two posts on Mortgage-Backed Securities (MBS) and pointed out that they offer higher yield than GICs. However, the main problem with MBS is that distributions are in the form of interest and principal repayments. Since most mortgages come with pre-payment privileges, when interest rates are falling, homeowners are likely to repay principal faster and slower in a rising interest rate environment. Investors, on the other hand, end up with the losing side of the bargain in both a falling and rising rate environment. David Swensen (in Unconventional Success) thinks that the downsides of MBS does not make up for the slightly higher interest rate and classifies it under “non-core” asset classes. Verdict: Avoid.
Confused Capitalist thinks that an overweighted position in emerging makets is prudent because “soaring GDP growth rates of 8-12% annually in some of these countries, expecting their stock valuations to follow isn’t much too much of a mental stretch”. Actually, there is a correlation between GDP growth and equity returns but in the other direction. Jeremy Siegel notes in The Future for Investors that “[GDP] Growth is not enough to sustain a profitable investment strategy”. The market weight of emerging markets is 9% in the world capital markets and there is no reason to allocate more than that for emerging markets in the international equities portion of your portfolio. Verdict: Market weight for emerging markets is plenty.