An Open Answer To Questions About Aramco Investing

An Open Answer To Questions About Aramco Investing

Dear Saudi Friends,

The Saudi Aramco IPO is finally here. The excitement is real and warranted. This is a huge opportunity for the kingdom and the people of Saudi Arabia. Oil has long been known as Saudi Arabia’s, “gift from God,” but, as one former Aramco CEO once said, “the recovery of oil is really the work of men.” That is Aramco’s role, and it has been exceptional at fulfilling its responsibility.

Nevertheless, it is time to temper that enthusiasm just a little. I have been asked by countless Saudis—online, in Riyadh and even in person in the United States—if they should invest in the IPO. Keep in mind, I don’t give stock tips, but here is my answer:

There are strong indications that a bubble will grow around Aramco shares as reports come out that some Saudis are going to extreme lengths to invest in this stock. Investing is great, but please abstain from taking loans, mortgaging your home, sacrificing your children’s inheritance or foregoing other promising opportunities to buy in to this IPO. Do not go overboard just because everyone else is. Please remember that the markets have no compassion, and no speculation is worth more risk than you can afford.

I have been one of the biggest champions of Aramco’s formula for success for years. As a business historian, I have studied the company for more than a decade. I wrote a book about the history of Aramco and, particularly, the ability of the Saudi technocrats and managers who made it the success it is today. I have written extensively about the resources, strategies and talent that continue to make Aramco exceptional. And I have argued against ignorant analysts, explaining that Aramco is so much more than a company lucky to have access to a lot of oil.

From the time Prince Mohammed first mentioned the idea of an IPO almost four years ago, I have highlighted the opportunities for Saudi citizens. I said from the start that this is a chance for all Saudis to have a direct stake in the kingdom’s crown jewel. However, there must be a limit to this exuberance.

Investments in this IPO are not without risk. In fact, the risks may be severe. Some reports estimate that up to one third of all Saudis will invest. The share price may very likely appear quite high on that first day of trading in December, and it seems likely it will rise thereafter. But there are reasons to fear a bubble, a phenomenon in which the price of the stock is overpriced and will eventually plummet.

The liquidity of shares in the first few months probably will be lower than it should be. Saudis who invest in the IPO are incentivized to hold onto their shares for at least six months under a program that will grant them an extra share for every ten they own for the entirety of that period. That means many individual Saudis, called retail investors, will not sell until at least the summer. Moreover, wealthy Saudis, Saudi businesses and Saudi financial institutions have been asked by the government to invest. They, too, will be discouraged from selling quickly. Also, the nature of the listing is discouraging to foreign investment funds, because the purchases must be made in riyals and the dividends are disbursed in riyals. Thus, foreign investors, who are more likely to trade soon and often, will be limited.

Therefore, it is quite likely that in the first days, weeks and months after the IPO, the trading volume will be minimal. As some investors wish to get in or buy more shares, the price will rise. If the trading volume is too low to find enough buyers, the price could rise significantly. Surely, this is what the company, the government and investors want.

But once summer comes, things could change. The Saudi retail investors will receive their extra shares earned by holding the investment for six months. Some large Saudi investors will eventually start selling shares. Most significantly, after six months, the Saudi government will be permitted legally to sell more shares. Government officials have long indicated that the government will sell more shares after the IPO. It may list more shares on an international exchange, perhaps Tokyo, or it may sell additional shares on Tadawul. In any case, if the government floods the market with an additional 1%, 2% or 5% of the company, it will send the value of your shares plummeting. As the IPO prospectus itself warns, the sale of more shares by the government—or even just the perception that this will happen—“could cause the market price of the Shares to decline significantly.” The bubble would burst.

We have seen burst bubbles before, leaving investors distraught and destitute. The most famous was the Dutch tulip mania in the seventeenth century, when the price of tulip bulbs kept rising and rising until everyone wanted to be a part of the craze. That is, until it all crashed, ruining the lives of thousands. 90 years ago, the New York Stock Exchange collapsed, signaling the start of the Great Depression. Fortunes were lost and lives were ruined. In grim scenes, men jumped to their deaths from New York skyscrapers. In 2008, the US faced another burst bubble, when the housing market collapsed, and families lost their homes across the country. Even in Saudi Arabia, just 13 years ago, investors faced a crash of Tadawul leading to a rise in suicides.

I am not saying you should or should not invest in Aramco. I am simply saying you should avoid the mania. Do not incur debt to buy stock. Do not mortgage your home. Make sure you still have enough for your children. Remember that stock investing is always a risk. In the markets, nothing goes up forever.

Note: The author does not give investment advice.

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