Monday, May 28, 2012

Facebook, Greed and Responsibility


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.

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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