Medibank Private going public

So the big news this week is that Medibank private is going public. The government is selling shares in Medibank private and will be a publicly listed company on the ASX.

So, should we all be signing up to get as much of an allocation of the shares as possible?

When these large government owned companies are listed, mum and dad investors usually rush at the opportunity to buy these shares for some reason. Because they're well known, it somehow makes it a good investment?

The biggest government sell off in recent history was Telstra, Telstra's first sell off happened in 1997 with an issue price of $3.30. The stock then took off over the next few years and the second installment was then issued in 1999 at $7.40, people rushed to it because the first installment had over doubled. For the first month after T2 floated, it was looking good, the stock price peaked at over $9 but that is when the party ended, in a big way. The stock then spent the next 10 years slowly falling back to below it's original T1 list price and bottomed at about $2.60.

So what can we learn about the Telstra float and apply to the Medibank private float? NOTHING. It might take off over the first few years, it might not.

So, should you buy Medibank private on the float, or after the stock is listed or not at all. Well the reason you would pre purchase Medibank private shares is because you believe the issue price is less than what the market will value the stock on first listing. Is it cheaper than what the market will value it? I don't know, no one really does. It will purely be a gamble.

So, should you own the stock after it has been listed? Well, you would only do that if the market has priced stock wrong after listing and you believe it is undervalued. Will it be undervalued? I don't know, no one really does. It will purely be a gamble.

Investing in 1 particular stock over the market as a whole is speculating that the stock is going to outperform the market. That is speculation not investing. There is a notion that to be a successful investor, you use the information available to identify good stocks that will perform better than the other stocks. The problem with this idea of thinking is that other people don't have that same information.  But everyone has all available information and that information is used daily to price all stocks to fair value based on the risk of the stock  (ie. if the stock is riskier, the market will price it lower so that it has a higher expected return). Sure, tomorrow they are all going to perform differently, but that will be based on the new information available tomorrow.

So, what should you do? Forget the hype about big government owned corporations listing. If you want to invest to create wealth, diversify across the whole market and only take risk where there it has been proven that you are rewarded for the risk over the long term. Don't take bets on particular shares and remain disciplined.

I'm not saying that Medibank Private won't perform well, it very much might. Just like black might roll up next on the roulette table. Invest in Medibank Private if you so wish.