Skip to comments.Sorry, Facebook Investors: It's Mostly Your Fault
Posted on 05/25/2012 5:38:22 AM PDT by SeekAndFind
Stop me if you've heard this one.
Thousands of largely novice investors line up for what's been billed as "the opportunity of a lifetime" to buy a "can't-miss" investment destined for easy gains. Pundits take position and say it's worth buying at "any price." People whisper in anticipation over how much they'll make. Fifty percent? Double their money? More?
In the end, the floor drops out and they're left with hefty losses -- totally predictable losses. Furious investors want answers. What went wrong, they ask? The answer is usually complicated, but has a common denominator: You overpaid. Fell for the hype. Gambled and lost. It happens.
This could explain the dot-com bubble or the housing collapse. But it also sums up what's happened to Facebook (Nasdaq: FB ) over the last few days.
By Tuesday afternoon -- two trading days into life as a public company -- Facebook shares were down more than 30% from their Friday high.
Investor complaints weren't far behind. They sued Facebook. They sued Nasdaq. They sued Morgan Stanley (NYSE: MS ) . They asked for, and will receive, an SEC investigation. Don't be surprised if NATO gets involved at this point.
Some of the outrage might be justified. There are legitimate claims that bankers withheld information from some customers, and that Nasdaq botched trade executions. One Nasdaq official admitted that, in hindsight, the IPO should have been delayed.
But what really led to investor losses isn't a conspiracy. Every investor has heard that you need to be "fearful when others are greedy," yet look at what happened on Friday. At an IPO price of $38 a share, Facebook traded at around 100 times earnings and 25 times revenue -- something straight out of 1999. The offering was oversubscribed 25 times over in Asia alone. Facebook increased the number of shares to be sold by 25%. Several company insiders more than doubled the amount of stock they originally planned on offering for sale. All of that was public information known before the IPO.
Investors didn't seem to care. They had easy money on their minds. And the fact that investors stomped their feet over losses a few hours after the company began trading tells you something about them: They aren't really investors. They're short-term speculators. Really short-term speculators.
You have no one to blame but yourself, folks. As Reuters blogger Felix Salmon put it:
Finally, there are all the investors ... who bought into the IPO even though they knew that the valuation was incredibly high, and are now casting around for someone else to blame for their losses. It's impossible to feel any sympathy for these people -- especially institutions who had no appetite for stock at more than $32 per share, but put in large orders at $38 anyway just because they were counting on Morgan Stanley to give them a nice opening-day pop. If you pay 100X earnings for a hyped Internet stock on its first day of trading and then you lose money, you frankly had it coming. Or as Jonathan Weil of Bloomberg wrote: "Nobody forced anyone to buy Facebook shares. Blaming the company's underwriters for the stock's plunge is like losing money at a casino and then waiting until afterward to complain about the house's odds."
So, what are the lessons here?
A satirical Twitter account for Goldman Sachs (NYSE: GS ) employees reminds us of a big one: "Retail investors should be circumspect of any offering they're able to get their hands on. If you can get it, you don't want it."
Wall Street doesn't have small investors' best interest at heart. That should be excruciatingly clear after all these years. Most companies don't go public because they want to let you in on the action. They do so to let insiders cash out richly priced shares onto unsuspecting gulls. You're only a victim of that as much as you're willing to let yourself be.
Second, this should be a reminder that there's a difference between a great company and a great investment. Facebook is an amazing company. Users, revenue, and earnings will probably grow like weeds for several years. But that doesn't mean it's worth $100 billon. It might not even be worth $50 billion. Any investment can be a steal at one price and a rip-off at another. I've shown several high-quality companies, including Google (Nasdaq: GOOG ) and Wal-Mart (NYSE: WMT ) , that doubled earnings while their share prices went nowhere. It all comes down to valuation. If you pay too much for a stock, you'll have a miserable go even if the company flourishes. Facebook isn't immune to that rule. No company is.
Here's what's sad: Some say Facebook's IPO flop will make it harder for other companies to go public in the future, since investors will be more wary. I don't buy that. A few months from now people will forget about this -- just like they forgot about the dot-com bust and the housing bubble -- and we'll be right here again, watching investors lick their wounds after learning the dear consequences of running with the crowd.
Duh! Most IPOs are over priced because the company knows to sell the stuff high and buy low. They are not going to do the reverse.
Let the banks compute the price and trade out the junk with each other in the after market. And if sales men can sell it for the price for long term gains or control tradeoffs to the banks, it’s up to the investors to figure what to do and how to take control of FB themselves.
This buying of stocks as if it was just easy money is again the new leftist mentality of entitled investment.
Day trading, to work out, requires work and using the leverage to controling your assets. But now they are using this to take the power of control away from the owner and to the pimping exploiting government.
I see FB as a social network thats perfect for a Marxist pogrom to exploit.
I wonder if Zuckerman has some leverage over the brokers using Facebook network which could have nudged the money guys to go higher on stock price than they otherwise would have.
Never invest in a fad.
I never recovered from the pet rock crash of ‘75.
“It’s immoral to let a sucker keep his money” - Canada Bill Jones
It’s easy to write an “I told you so” story after the fact. I wouldn’t be surprised if Motley Fool also had a “You shouldda bought” story in the wings had the price gone up.
As PT Barnum said “There is a sucker born every minute”.
People have such short term memory. Don’t they remember the DOT COM stock bubble. There were hundreds of these They bet their money on a stock price with a PE ratio of 75+. They did not do their homework. They made a bad bet, now their whining about it because they are losing. It is no differnet than the real estate bubble.
“I wonder if Zuckerman has some leverage over the brokers using Facebook network which could have nudged the money guys to go higher on stock price than they otherwise would have.”
I read something yesterday that the blame was on Zuckerberg for not caring about the IPO. In truth, the problem as I see it is when this stock opened, everyone who was anyone already cashed out and made their money, which left the public to fend for themselves.
What I want to know is did the brokerage houses tout this stock to the public knowing full well it was going to tank?
IPOs are the Ouija Board of finance. You just dont know where the little slider will be pulled to at the start.
Maybe they ought to change its designator to "FU".
My assumption is "of course". Think of their role as serving their investor clients. They are supposed to bring a product to their customer with the least amount of risk. No one can protect the customers from long term risk but on an initial issue they have a number of tools as well as a pretty good understanding of their customers' intents. If they did their job right, the stock would be issued a little on the low side of the market and it would give the initial subscribers a small profit and build momentum for future buyers.
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