Sign up to newsletter

It has been an interesting week, and we do not just mean with the American election. The election’s impact on the share markets has been confusing: on Wednesday afternoon prices fell by as much as 4.66%. But by Thursday night, market prices had bounced back and the market was up 2.9% for the whole week. Odd.

Anyway, you are probably sick of hearing about the election, so we want to talk about something else.

Our eye was drawn to some activity on the Australian share market this week. Something that highlights why the share market needs to be seen as a place where money can be lost, as well as made. Consider this a cautionary tale.

When a company’s shares are first traded on the share market, this is known as a ‘float’ or ‘going public.’ Companies generally float because they want to raise money from the public. The company might want to use public money to finance its activities. Or, the current owners of the company (the people who own shares before the float) may wish to find someone to buy some or all of their shares. These are both ways of raising money – albeit for quite different purposes.

Unfortunately, there is no rule that requires that a company must be a good investment before it lists on the share market. So, be careful about judging a company as a ‘good thing’ just because it is going public.

Consider a company called Yellow Brick Road. You might have seen the chairman of this company, Mark Bouris, on television hosting the Celebrity Apprentice (there you go – a link to the US election!). Bouris started Wizard Home Loans in 1996 and it was an enormous success. He sold it in in 2004 for a substantial profit.

He then founded Yellow Brick Road in 2007, and it went public in 2009. Unfortunately, it has not been a success. According to media reports, in the seven years since floating, the company has not made a profit, and the accumulated losses now total $37 million. This is reflected in the share market, where the market price has acted as you would expect for a company that is not making a profit. Here is Google’s graph:

As you can see, the company’s shares opened at $1.10 in February 2008. Since then the moves have mostly been down, with the shares currently trading at 16 cents. They have been as low as 5 cents per share in mid-2009.

Admittedly, some investors have made money on YBR. Those who bought for 5 cents in July 2009 saw the shares reach 60 cents in December 2010, and then go even higher to 72 cents by late 2014. But this rate of return (1200% in 18 months) meant buying shares in a company that had fallen more than 95% since it had floated and was yet to make a profit. Brave ‘investors’ indeed.

But the story for most investors over the years is one of losses. What’s more, the company has never paid a dividend. It is not allowed to because dividends can only be paid out of profits. If you do not make a profit, there is no chance of paying a dividend.

The story of YBR came to mind for us this week as we watched another company float. This company has links with Channel Nine as well. The company’s name is Domacom and you may have seen it trying to raise money to buy one of the Block Apartments. Yep. We know.

Like YBR, Domacom listed on the share market offering nothing more than its potential. It has not yet made a profit, and has actually raised very little revenue since it first commenced as a private company a few years ago.

Domacom floated on Monday. Before the float, shares were offered at 75 cents per share. They started trading on the ASX at 70 cents. By mid-morning Wednesday their market price had dropped to 31 cents, before ‘bouncing’ on Thursday to 35 cents (in very thin trade – just the one, by the looks of it). That is a fall of 50% from the initial market price (and more than that from the price at which people took up the offer before the float).

Like YBR, Domacom is run by people who did well with previous businesses. But the ‘new’ company being floated is not the old one. The new one has not made a profit. All investors were buying was potential. This is a surefire way to lose money.

When companies float, there is often a lot of hype. This hype means a lot of people see the company and assume, wrongly, that it must be doing well. Maybe people watching the Block will be among them. We hope not. Doing well and going public are nowhere near the same thing.