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5 Lessons I Learned from the Facebook IPO

Before 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 [3]… (a deeper look at this issue [4])

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 [5], 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?