The stock markets have always been a hotbed for investor emotions, where hype and excitement often override logic and reason. The recent oversubscription of Resourceful Automobile’s IPO is a perfect example of this phenomenon. The small-scale Yamaha bike dealership, with only eight employees, somehow managed to captivate investors, leading to an irrational frenzy far beyond any reasonable expectation. The IPO was subscribed 418.82 times overall, with retail investors leading the charge at 496.22 times subscription, while the “Other” category saw a 315.61 times subscription by August 26, 2024. The company was raising only Rs.12 Crore ($1.5 million) but it received bids of approximately Rs.5,000 Crore ($625 million). The stock listed at its issue price of Rs.117 and is now trading at Rs.87.5 with a market capitalization of Rs.23 Crore.

Let’s understand what really happened here and why this event is a reminder of the dangers of emotional, FOMO-driven investing.

The Story Behind Resourceful Automobile

At its core, Resourceful Automobile is a modest Yamaha bike dealership in India. It’s not a tech giant, nor a disruptive startup. It’s a traditional, local business with a simple operating model. While there’s nothing inherently wrong with this, the scale and nature of the business didn’t align with the excitement it generated in the market. Investors, driven by the fear of missing out (FOMO), flocked to subscribe to its IPO, believing it held potential for extraordinary growth.

The IPO was priced at a seemingly reasonable level, but investor demand far outstripped expectations, leading to a massive oversubscription. But was all this hype justified? A closer look suggests otherwise.

The Irrational Exuberance of Investors

The oversubscription of Resourceful Automobile’s IPO wasn’t driven by solid fundamentals or a revolutionary business model. Instead, it was a clear case of irrational exuberance, driven by three main factors:

1. FOMO (Fear of Missing Out): Investors often fear being left behind in a rally, especially when there’s talk of big returns. This fear can cloud their judgment and drive them to chase after opportunities without doing adequate research. In the case of Resourceful Automobile, many investors jumped in simply because they didn’t want to miss out on a “hot” IPO.
2. Lack of Due Diligence: Most investors failed to take a deep dive into the company’s financials or long-term growth potential. Many subscribed to the IPO based on hype, rumours, or the recommendations of others, without understanding the true nature of the business.
3. Over Reliance on Past IPO Performance: Investors often look at the success of previous IPOs as a benchmark. The strong performance of recent technology IPOs likely gave investors false confidence that Resourceful Automobile would follow suit, despite being in a completely different industry with very different fundamentals.

The Dangers of Overvaluation

The inflated enthusiasm surrounding the Resourceful Automobile IPO led to the company being overvalued by a wide margin. When investors chase hype instead of fundamentals, it often leads to inflated valuations that are unsustainable in the long run. Here are the dangers that come with overvaluations like this:

1. Imminent Price Correction: Once the dust settles and the excitement fades, reality tends to catch up. Investors will soon realize that Resourceful Automobile’s current valuation does not reflect its actual earning potential or growth trajectory. This will likely lead to a significant price correction, where the stock’s value drops to a more realistic level. This is exactly what is happening, and the price is now down 25% from its listing price.
2. Erosion of Investor Wealth: Investors who jumped into the IPO without doing proper research may find themselves facing losses. Overvalued stocks are highly volatile, and when the correction comes, those who bought at inflated prices could see their investment shrink significantly.
3. Damage to Market Confidence: High-profile IPOs like this can have a ripple effect on overall market sentiment. If Resourceful Automobile fails to meet investor expectations, it could discourage future investments, particularly in smaller companies or sectors that rely on IPOs to raise capital. Overvaluation can shake confidence in the market, making investors more cautious or sceptical about new opportunities. But in bullish markets, people generally have goldfish memories, and I won’t be surprised to see this stupidity continue.

The Psychology Behind IPO Frenzies

Why do IPOs, like that of Resourceful Automobile, create such hype? It boils down to basic human psychology.

• Scarcity Mindset: When investors hear that an IPO is “oversubscribed,” they equate it with exclusivity. They believe that since many people want it, it must be valuable. This scarcity mindset is often what drives FOMO. Investors believe they need to act quickly to secure their piece of the pie.
• Bandwagon Effect: The more people invest in a particular IPO, the more others want to join in. It’s the “if everyone’s doing it, it must be right” mentality. This herd behaviour leads to irrational decisions where investors don’t question the fundamentals but instead follow the crowd.

The Risks of FOMO-Driven Investments

FOMO can lead investors into risky territories. Here’s why it’s a dangerous mindset to adopt:

1. Chasing Overvalued Stocks: When investors act out of fear rather than logic, they tend to buy stocks at inflated prices. This not only increases their exposure to losses but also distorts their understanding of value. It’s crucial to recognize that just because an IPO is oversubscribed doesn’t mean it’s a sound investment.
2. Emotional Decision-Making: Investing should be a rational process based on research and long-term thinking. However, when FOMO kicks in, emotions take over, and investors make impulsive decisions. These decisions are often regretted when the hype dies down and the true value of the stock emerges.
3. Increased Volatility: Stocks driven by hype and emotion are often more volatile. Price swings are common as early investors seek to capitalize on short-term gains, while others panic and sell as soon as the stock dips. This volatility can be nerve-wracking for investors and lead to hasty decisions.

Lessons for Investors: Stay Grounded

The Resourceful Automobile IPO serves as a timely reminder for investors to stay grounded and avoid being swept up by market hype. Here’s what investors should take away from this event:

1. Do Your Research or Seek the Counsel of a Real Financial Professional: Before jumping into any investment, especially an IPO, take the time to thoroughly understand the business. Look at the company’s financial health, its business model, and its potential for growth. Don’t rely solely on market sentiment or recommendations from others.
2. Understand Valuation: Learn to differentiate between a stock’s price and its actual value. Just because a stock is trading at a high price doesn’t mean it’s worth that much. Be wary of overvaluation, and always ask yourself whether the company’s fundamentals justify the current price.
3. Keep Emotions in Check: The stock market is a long-term game. It’s easy to get caught up in short-term hype, but successful investing requires patience and discipline. Don’t let fear or excitement drive your decisions. Stick to a strategy that’s based on research and long-term goals.
4. Diversify Your Portfolio: Never put all your eggs in one basket. Even if an IPO looks like a great opportunity, make sure your investments are diversified across different sectors and asset classes. This reduces your risk and provides a buffer against volatility in any one area.
5. Resist the Urge to Follow the Crowd (and the Noise): Just because everyone else is investing in an IPO doesn’t mean you should. Herd behaviour can lead to poor decisions. Take a step back, do your own analysis, and decide if the investment makes sense for your portfolio.

Stay Disciplined

The oversubscription of this IPO is a classic case of how emotions can drive irrational decisions in the stock market. While the company may have a future, its current valuation is based more on hype than reality. Investors who were caught up in the frenzy will likely face disappointment when the stock corrects.

This IPO should serve as a cautionary tale for investors. Don’t let FOMO or market hype dictate your investment decisions. Always focus on the fundamentals, do your research, and make sure that your investments align with your long-term financial goals. By staying disciplined and avoiding the emotional traps of the market, you can protect your wealth and build a portfolio that stands the test of time.