Sorry, Facebook investors: it's mostly your fault
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?
This could explain the dot-com bubble or the housing collapse. But it also sums up what's happened to Facebook (NAS: 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:
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 (NAS: GOOG) and Wal-Mart, 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.
Are you looking to profit as a long-term investor? "10 Steps To Making A Million In The Market" is the latest Motley Fool guide to help Britain invest. Better. We urge you to read the report today -- while it's still free and available. Alan does not own any shares mentioned in this article.
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