May 16, 2013

Don't Believe the Hype

May 18 marks the one-year anniversary of the Facebook initial public stock offering. Coincidentally I re-watched The Social Network last week, so the company and its mythology have been on my mind the past few days. Facebook’s legend vs. reality form a good example of why investors shouldn’t buy into hyperventilating market analysis.

Facebook’s shares initially sold for $38 and closed the first day of trading at $38.23, a minimal gain. They’ve declined in price since.

Newly public companies and their underwriters try to price shares high enough to garner a tidy pile of money for themselves while leaving room for a modest price jump after the open. In Facebook’s case, the initial price was first set at around $28, but subsequently was adjusted up $10 per share. Greed informed that grab for more of the public's money.

There were significant technical glitches affecting that first morning’s trading, but a year later the effect of those bumps has washed out of the price. Yet today FB is trading at around $26. Nice haircut, huh?

The only people who made money on the IPO were insiders and company founders. The average Joe looking to get in on this century’s Netscape or this decade’s Google, and helped along by countless upbeat news stories, is down by around $12 (31%) per share a year later. The S&P 500, a broad slice of the overall US equity market, his gained over 25% over the same period.

There’s a lesson in there, somewhere.

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