An IPO is like a negotiated transaction

Buffett: An IPO is like a negotiated transaction – the seller chooses when to come public – and it’s unlikely to be a time that’s favorable to you. So, by scanning 100 IPOs, you’re way less likely to find anything interesting than scanning an average group of 100 stocks.

The seller of a $100,000 house in Omaha will never sell for $50,000. But if 100 entities each owned 1% of a basket of homes in Omaha, the price could be anywhere.

You’re way more likely to get incredible prices in an auction market.

Source: 2004 BRK Annual Meeting


Question: Using Charlie’s method of inversion, if you won’t tell us what to buy, will you tell us what you wouldn’t buy?

BUFFETT: New issues. They’re hyped, they come with a 7% commission, and the seller chooses when to enter the market. It’s almost impossible for that set of ingredients to make something the cheapest opportunity in the market. Just don’t make big mistakes.

MUNGER: If something comes with a large commission, don’t even read it. Look at things other smart people are buying.

Source: Gongol notes from the 2012 Berkshire Hathaway shareholders’ meeting