On May 18 Facebook held its initial public stock offering
(IPO). By the following Tuesday, the
value of the stock had fallen from $38 per share to $31 per share, a loss of
18%. This was accompanied by rumors that
an analyst from Morgan Stanley, one of the underwriters, had shared a new, less
optimistic analysis with only a limited number of clients; it was not shared with the general
public.
The news broke a couple of days later that three investors
were suing Morgan Stanley and Facebook. One
interviewed in this article is a professor at Florida Atlantic University. He describes IPOs as tricky but adds, "this
one had a lot of glamour, had a lot of interest. It has a lot of users. I
thought it'd be a pretty good investment."
So he used his E*TRADE account to buy 1800 shares and potentially
lost a lot of money. (It isn’t lost
until he sells the stock.)
News of a lawsuit always strikes me as a good place to look
for evidence of lapses in personal responsibility, the desire to blame your
problems on another and not as the consequences of your own behavior. This one made it easy. Here is a college professor, an educated
man. He did not fall off the last turnip
truck and fall prey to evil conmen. He
understood and admitted that IPOs are tricky.
He understood what he was investing in.
It’s not like Facebook’s business model is some kind of mystery. News reports prior to the IPO were filled
with questions about how Facebook was going to increase its profitability to
justify the price and how overvalued the stock was in terms of its current price-earnings
ratio. In addition, no one twisted his
arm or tried to talk him into it. E*TRADE,
after all is an on-line, discount broker where representatives don’t call with
the latest stock tips trying to pressure you to buy. But he decided to plunk down over $77,000
(plus the small commission) on the basis that it would be a good investment
because it “had a lot of glamour, had a lot of interest...[and] a lot of
users.” When results came in a few days later, he was disappointed and upset.
When it comes to the stock market, I distinguish between
investors and traders. Investors are in
it for the long term, making investments and riding them out. Traders look for a short-term profit – think
“day trader.” The above are not the
actions of an investor. Interest, glamor
and popularity have nothing to do with the long-term performance of a company
or its stock. People who were lured in
on this premise are victims of their own desire to make a quick buck or to get
in on the ground floor of a possibly high-flying stock.
Investing is based on risk/reward. Those who expected a big reward without the corresponding risk were being naïve or greedy and became victims of their own mindset. Responsible individuals take credit for their successes but also their mistakes. They don’t try to shift the blame, legally or otherwise.
Investing is based on risk/reward. Those who expected a big reward without the corresponding risk were being naïve or greedy and became victims of their own mindset. Responsible individuals take credit for their successes but also their mistakes. They don’t try to shift the blame, legally or otherwise.
Disclosure:
I'm confident (but not thrilled) that I do own shares of Facebook and JP Morgan Chase, but only through a
Total US Stock Market Index mutual fund that owns shares of every public company, not through
individual stock purchases.
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