It's been a spectacular bull run. Spectacular not just in terms of how long it has lasted but also in terms of the huge earnings that investors have made. This particular bull run has also been significant for another reason. It has seen unprecedented money flowing into the primary market. Take a look at this: from a mere Rs 2,307 crore in 2003-04, the capital mobilised through fresh issues skyrocketed to about Rs 14,869 crore in fiscal 2004-05. More; it is estimated that from January 2004 to today, investors have made a net gain of roughly Rs 19,500 crore just on primary market investments where the issue size was at least Rs 100 crore.

If that's the case, why is everybody crying wolf on IPOs and the primary market? Shouldn't investors be kicked with the sheer volume of riches they are supposedly raking in? Unfortunately, it has not been a story of unmitigated gain alone. A significant portion of the earnings has gone to institutional investors, with retail investors managing to corner only a small share. Worse, a large number of retail investors have made heavy losses.

While some of the blame for this can be laid at the door of poor regulation, heavily speculative practices of institutional buyers, and the suspected rigging of listing prices, the average Joe investor cannot shrug off all responsibility. Cupidity compounded by stupidity seems to have been the guiding principle when it comes to investing in the primary market. There has been little attempt at independent stock research, people have just rushed blindly after anything that listed, in the fond hope that buying into a new issue is in itself a guaranteed way to profit. As Prithvi Haldea, CEO, Prime Database, asks: "Why do investors treat investing in the primary market as different from the secondary market? They can't take it easy and lie back and expect IPOs to give them assured returns on their investment."

For investors who do think it's that easy, here are some interesting numbers: of the 89 companies listed since January 2004, as many as 19 are quoting below their offer price, while several more have recorded a bare 0.33 per cent to 8 per cent gains. For people who bought into these scrips, the primary market has been punishing.

Where are these investors going wrong? The problem is the old one-that of selection. It's imperative that investors ensure that their money goes into the right issues. True, that task is not easy, which is why the promoters of companies going public have to be totally transparent. More so during a bull run when, as investment bankers point out, the responsibility of such companies towards their investors is much higher.

Unfortunately, the reputation of many companies in this regard has not exactly been squeaky clean. They just ensure that their financials look good in the quarter leading to the IPO. And they launch in a bull market. The extent to which the sentiment in the secondary market helps increase valuations cannot be overstated. "This forces some companies to get listed before they achieve critical size, which is why valuations are stretched in some cases," points out Sanjay Sharma, Head, Equity Origination & Capital Markets, DSP Merrill Lynch.

Soon after listing, though, the performance starts to unravel, with revenues and profits falling sharply (see Dismal Showing), and the scrip often follows suit. Says a merchant banker, "The non-performance of stocks after an IPO is because companies stretch themselves before the IPO to get a good price. When there are no returns in the short term, investors don't buy in anymore and exit initial holdings."

Take Datamatics Technologies, which listed in May 2004. From Rs 7.26 crore in the quarter ended June 2004, net profits fell to Rs 4.33 crore in the quarter ended June 2005. Vidur Bhogilal, CFO, Datamatics, while admitting that the company's financial performance has not been up to expectations, adds: "Our overseas subsidiaries have been in the red and our costs escalated more than anticipated due to ramping up of projects, which did not finally come through."

Or take Jet Airways, which went public early this year. It is trading today at a less than 10 per cent premium to its Rs 1,100 offer price. Its financial results have been unimpressive. Commenting on her company's showing, a Jet Airways spokesperson said that despite problems like fuel prices and flood-related disruptions, profit before tax (pbt) was up 9 per cent. Significantly, given the low awareness about the airlines sector, the company's IPO valuation was difficult to understand at the time. As for Biocon, which listed last year, growth has suffered because of delays in getting regulatory approvals, said President, Group Finance, Murali Krishnan KN.

How is pricing determined then before a public issue? Where, for instance, is the point when companies and investment bankers stop and say the pricing is fair? (See How Much Is Too Much?) Says J. Niranjan, Joint Head, Investment Banking, M&A Advisory, ICICI Securities: "IPO pricing is not unrelated to market sentiment. However, bankers price an IPO lower than its intrinsic value-generally at a 15-20 per cent discount to its expected trading price."

Clearly, though, IPOs do hit the market at stiff prices that are often not justified by subsequent performance. Obviously, the credibility of the promoters and of the bankers suffers immensely then. It is critical for the banker, says Mahesh Chhabria, Co-Head (Investment Banking), Enam Financial Consultants, to anticipate the stock's future demand and price, which means the banker's job does not end with just the listing. Adds Niranjan: "If an issue is wrongly priced and the investor loses money, it has serious consequences for us. Investment banks are aware of this responsibility when pricing issues." Despite this, an IPO's pricing does increase in a bull market. Pricing is based on appropriate discounts to peer valuation, and this discount falls in a bull market and rises in a bear market. Which is why there are almost 50 companies queuing up with IPOs, of which full details are available for about 20 (see In the Pipeline).

Where does this IPO frenzy leave the investor? Answer: get back to basics. Study the company and its business well before getting into the stock. "Retail investors should follow simple norms like understanding the company and go through the Management Discussion and Analysis (in the annual report)," says Sharma.

With post-listing gains falling for so many companies, Niranjan points out that investors need to be vastly more careful: "With the markets so volatile, and weak and small issues hitting the market, the performance of the primary market could be under pressure." Another obvious precaution investors can take is look for outside advice. As Sharma says: "If they cannot take an informed decision, they could look at the reputation of the investment banker or come in through the mutual fund route."

Most important, as Haldea points out, investors should learn when to exit. The primary market is not some sort of bogeyman in itself. "In most cases," points out Haldea, "greed has been the reason for investors not making money in the primary market. They should consider themselves lucky that a bull market at least gives them an exit route at a price higher than the offer price at some point or other."

If you didn't do your homework, grab that chance at least.