5 Lessons I Learned from the Facebook IPO

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FacebookBefore the Facebook IPO, I wrote about how I wasn’t going to buy any shares. Then 11 AM rolls around, the NASDAQ opening cross on the stock put it at around $45 (that’s where the bids and asks meet, the NASDAQ gives you a general idea of where that is), and I thought why not play a little. I put in a limit order at $42 once the cross slipped to $43. I figured that there was a 99% chance my order wouldn’t get filled because I still thought the stock was going up (at least day 1). Then the IPO was delayed for about thirty minutes and I thought – “this is stupid, cancel that order.” Fortunately I did!

Looking back, I had no idea the underwriters were pimping out shares to their clients. I had no idea NASDAQ was having trouble processing orders. All the chaos that’s coming out in the news now was not known in real time, certainly not as well known anyway. I knew that things were not going in an orderly fashion and that almost always spells trouble.

Here are five lessons I learned from the Facebook IPO:

Beware Exuberance

I know the stock market is separated into two groups – institutional investors and retail investors. I know that retail investors, like myself, are the fish. I know that brokers cater to institutional investors because they handle vast sums of money. Do you want to answer to one boss that pays you $1,000,000 a year or 1000 bosses that pay you $1,000 a year? Easy answer.

Just this week, there was news that Morgan Stanley cut its revenue forecasts for Facebook a few days before the IPO. Who did they tell? Perhaps a few select clients… (a deeper look at this issue)

The number one thing that I learned from the economic crisis, and subsequently the Facebook IPO, is that one of the worst times to buy anything is when everyone is excited and positive. If you invested when the economic future looked bleaker, you did well as the market recovered. Too many people were too excited about the Facebook IPO and that worried me.

You Won’t Get Rich

When you look at the roulette table, do you think that’s your pathway to riches? Not “make a few extra dollars today” rich, I mean life changing rich. Probably not. So why would you look at any stock IPO as a pathway to that type of money? The only people making a lot off the stock IPO are those folks who were granted shares because they work at the company. Stories of administrative assistants at Microsoft and Google buying Ferraris are plentiful, but there were no stories of millionaire IPO participants after day one. It might be possible at day 1000, but certainly not day one.

Unless you work at the company or otherwise got shares before the IPO, like this brilliant painter, it’s not going to make you rich.

If you aren’t doing it for the quick hit of cash, and you’re buying it for the long haul, it’s best to wait. Wait until there are official SEC filings for a few quarters so things can shake themselves out. Wait until options can be traded, so the shorts can get in if they want to, or wait until the next slug of shares exit lockup. There are so many variables, outside of a company’s fundamentals, that have yet to be introduced… it’s dangerous to buy so early in the game. It’s like playing a sport where the rules change each inning/quarter/period.

You Shouldn’t Need to “Sell” an IPO

For all the horror stories you hear about boiler rooms, I’ve never met anyone who was offered shares by his broker… until this weekend. Granted, I know more working stiffs than jet set bazillionaires, but it’s still a telling fact. One of my friends got a call from his broker asking him if he wanted some Facebook shares. He did but since he worked at another brokerage, in a non-trading role, he was ineligible. While I’ve only heard one such story, there are plenty similar ones all over the place as underwriters scrambled to sell the shares they were allotted. Apparently, in the 11th hour, brokers were given more shares and had trouble getting them out.

When was the last time you heard anyone get a call from his or her broker about an IPO? Never! It’s always the other way. An IPO is supposed to be a gift that a broker gives to a client. It’s like being outside a nightclub and getting paid to go in… do you really want to be part of a party like that?

Do You Understand It?

How many people truly understand Facebook’s business model? Do you know how it makes money? You might point to the advertisements, and you’d be right, but the key is understanding how they can add revenue streams because the IPO price valued the company at a ridiculous multiple over their current income. When this happens, it means that people are either stupid and overpaying for a stock or they think the company is a growth story and can add additional streams of income.

I’m involved in the web and while I understand how it makes money now, I don’t know what they can do to justify such a high multiple. I know they have trouble monetizing mobile, which is where a lot of the traffic comes from, and that uncertainty, in my mind, makes it unattractive. I understand Facebook about as well as I understand Apple and Apple has a far far far lower multiple. And their products are tangible and in everyone’s pocket.

Missing Money Trains is OK

I think the big reason why so many people get involved in these big story stocks is because they don’t want to miss the money train. People are talking non-stop about the Facebook IPO. Unfortunately, they’re talking about how NASDAQ bungled up orders, how the underwriters mis-priced the stock and juiced up the supply, and how there might be class action lawsuits as the stock continues to drop. Flip it back a few years to when Google IPO’d in 2004 (it’s been nearly 8 years!) with a weird auction system – the stories after that were glowing. How many people missed Google and now didn’t want to miss Facebook? The answer is more than one.

It’s OK to miss the money train. It seems like every time I look up a stock ticker, there’s some big news the next day. I can wonder all I want about the “what ifs” but if I bought shares of every ticker I looked up, I’d be in bad shape. The key is to pick your spots deliberately and not trying to hit the home run.

Did you buy any shares? Did you avoid it? Did you learn anything by watching what happened the last few days?

{ 11 comments, please add your thoughts now! }

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11 Responses to “5 Lessons I Learned from the Facebook IPO”

  1. Wilma says:

    Since joining The Yahoo Fantasy Finance game I’ve taken in everything I can as a learning experience. I watched the Facebook IPO opening date with interest. I don’t pretend to understand the stock market but I’m trying. The game is teaching me a lot. As far as what I learnt from the Facebook IPO release day? In this economy you better have value and longevity to offer the investors.

    I’ve never understood Facebook or why people hang on it. There’s e-mail, the postal service, telephones and Skype to get all your TRUE friends and family updated…….privately. To me Facebook has no monetary or social value. Like you said, It produces nothing tangible and Facebook is just a fad. On some level those investors in the stock market know it too. That’s why it didn’t go any where. Unless Facebook comes up with something new and innovative like they integrate a phone service or some other service into what they are now, they will be replaced by the next version of social networking.

    • Jim says:

      I think it’s crucial to never get to the point where you think you “understand the stock market.” It’s like saying you “understand a mob,” it’s just not possible. Kudos to you for learning.

      I think Facebook is the easiest way to do it online. Part of it stems from the fact that you can “update” a lot of people at once, in theory. I don’t know if Facebook is a fad though, it’s been a long time since instant messenger came out and people still use messaging.

      The problem is they don’t know how Facebook will be able to make more money.

  2. JimS says:

    > “I know they have trouble monetizing mobile, which is where a lot of the traffic comes from, and that uncertainty, in my mind, makes it unattractive”

    At the same time, this makes it somewhat attractive also, as it represents untapped potential revenue. Yes, there’s uncertainty, and I’m not saying it’s attractive at $38 or even $28, but I could understand people being interested at $15-20.

    • Jim says:

      It is untapped revenue but the multiples are assuming they can add new revenue streams. That’s the big problem – the market has already priced in a lot of growth. At $15-20 the multiple slims down a bit to where you could benefit from new revenue streams. At this level, you’re only hurt when new streams don’t appear fast enough.

  3. The lesson I learned from observing the Facebook IPO and the aftermath is to stay away from IPOs. Tentatively (pending further revelation of facts), my feeling is Facebook’s chief owners and Morgan Stanley set out to con as many of Facebook’s ‘believers’ (aka users) into taking FB off their hands at an indefensible $38/sh so they could all cash in and make billions. Caveat emptor and all that, but I’d bet the SEC takes a run at this one.

  4. The lesson all investors should have learned is that valuations always matter, and Facebook is not even close to being cheap today. The Greater Fool Theory may work for a while, but trees don’t grow to the moon, and sooner or later the stock valuation will be based on earnings rather than hope.

  5. eric says:

    Ha! You almost didn’t take your own advice 😉 Luckily, I was gone most of the day doing other stuff and not stuck at my computer monitoring everything 🙂

  6. Carl Lassegue says:

    Reason #1 is the main reason I stayed away from the FB IPO. It’s the law of supply and demand. Because so many people wanted it, that would most likely drive the price up and people would end up paying an inflated price for it.

  7. Long says:

    Jim, I’m glad you cancelled your order. Underwriters frequently prop up IPO share prices on the first day of trading. Facebook just happened to be a lot more active than most.

    • skylog says:

      i loved how it kept hitting 38.00 time after time in the last few hours, but would never fall below. sure, free market

  8. Jerry Chin says:

    The lesson you should learn from this is that public equities (the stock market aka Wall Street) offer the WORST returns on your investment money. The problems seen in the FB IPO, the insider information, the price fixing, the use of retail losses to subsidize institutional gains, NASDAQ technology problems is rampant throughout the stock market and is not an isolated incident with the FB IPO. The American public’s propensity to invest in stocks is just evidence of how the public can be easily duped into doing something that has zero benefit to it simply by applying the basics of marketing to the masses. Investing in bonds, private companies, art, your own education, real estate (yes, real estate), and the overall stock market (which is much different than trading individual stocks) offers much better returns. Learn from the FB IPO, don’t buy the hype. But I doubt anyone will learn anything from this. As the great PT Barnum once said, “there’s a sucker born everyday.”

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