Buying into the Facebook “IPO” is stoopid

We interrupt our normal coverage of our Protecting Income series to bring you part 2 of our Dose of Reality series.  If you missed part 1 or it isn’t fresh in your mind, hop on over to learn why comparing yourself to Warren Buffet is not a good idea.  Here in part 2, we’ll explain why investing in the highly anticipated “IPO” of instabook is a bad idea.

Anyone wanting to invest in the IPO and asking the question, “how do I buy shares of the facebook IPO” probably doesn’t have the ability to buy ANY IPO shares.  Otherwise, you probably wouldn’t be reading this here.  But, you can buy at the $38/share or whatever they are asking and sell to some schmuck when the price spikes to make a handsome profit, right?  Well, who is that schmuck?

Here is how it works.  The Zuck and his high brained team are going around to banks and investment firms the next couple of days convincing the banks facebook is actually worth what they say they are worth.  The banks will then go to their institutional investors and hedge fund managers to buy the shares.  They buy at the IPO price.  And since there is so much hype around the IPO, you’d have to be out of your mind to pass up on some IPO shares.  You’ll see later why you would be crazy to pass up on some actual IPO shares.

After the institutional investors ($10’s of millions to invest) and hedge fund managers pick over the opportunity, the scraps are then passed on to us, the retail investor.  But, with facebook, everyone will clean their plate.  So, put in those orders with your brokerage house, but don’t be disappointed if you don’t get any IPO shares.

Why won’t there be anything left for retail investors?  Because of all the hype.  This is what happens after the IPO.  All the retail investors think they can make some money.  So, they put in an order with their brokerage house to buy on the day after the IPO on the open market thinking this is actually buying the IPO.  When in fact, it is buying after the IPO on the open market.  The price shoots up, those with IPO shares dump some and make a profit.  Then, after the retail investors are done getting in on the action, the price will settle.  So, say facegram opens on the market @ $38/share.  Then spikes up to $50 when all the retail investors are buying through their buy order placed the day before.  Then it settles back down around $43/share.  You just lost like 14%.  But the headlines will read, “Facebook IPO a success, shares go from $38 to $43.”  The institutional investors will throw us retail people a bone and gladly sell their shares for a 31% profit.

Don’t be a schmuck, you’ll loose as a retail investor.  Of course, we could be entirely wrong and you could make millions.  We’ll be happy for you if you do, but we’ve seen this go down enough times to be highly skeptical.  But please, if you do make millions, come spike the football here in our face by leaving a comment.  If you want to buy facebook, do so in 6 months to a year, but we recommend to just let your index fund pick it up when the time becomes appropriate.

Don’t think you are buying the facebook IPO, you are buying after the IPO.  And don’t be a schmuck.


10 Responses to “Buying into the Facebook “IPO” is stoopid”

  1. 1 PK @ DQYDJ
    May 7, 2012 at 7:40 pm

    IPO – It’s probably overpriced, amirite?

    I haven’t seen hype like this since the Google IPO (which I didn’t touch, as I was a mutual fund only guy at the time). All I can say is thanks in advance everyone for minting some new Bay Area millionaires and indirectly improving my home value and compensation!

    • May 8, 2012 at 8:29 am

      Idunno. I’m not a valuation guy, but FB can be worth $77 to $96 bil. If you take the last 4 quarter earnings (~970 mil), that is a P/E of 79 to 99.

      CVX (chevron) is at what? P/E=8?
      GOOG is P/E = 12.
      MMM P/E = 12.
      LNKD P/E = 82.
      AMZN P/E = 86.

      So, where does FB fit in?

      Regardless of what your valuation is, FB will get their money because of the hype. We just hope too many people don’t become schmucks and loose out.

      Maybe the better question is, is the market efficient and will it correct itself? And when?

      • 3 PK @ DQYDJ
        May 8, 2012 at 9:00 am

        Or, is the Market Efficient, period? Facebook is about the be another feather in the ‘no’ cap.

        The funkiest thing of all was the profit drop last quarter. So $205 + $233, let’s assume your number scratches and they make around $900. I know P/E isn’t everything, but to justify a P/E that large you’d really want to expect massive growth. Of course, their profits shrank last quarter.

        I’m too cynical on this one. I think you’re right – over-subscription and retail investors buying the smart money drives up the price mid day, but selling pressure will bring it down by the end of the day. The other factor to keep an eye on? Zuck can sell some shares (and the California Tax Board is salivating…), but you’re talking about a 3-6 month lockup period on FB shares for the rank and file.

        Now I don’t usually touch tech in general (because I work in it, not because of Buffett emulation…), but I bet it’s safest to buy post-lockup.

      • May 8, 2012 at 12:18 pm

        The best bet is to let the index mutual funds pick it up when the time becomes appropriate. 🙂

        We’ll see if our theory becomes a reality in a couple of days.

  2. 5 Joe
    May 8, 2012 at 6:44 pm

    Whenever a person is “investing” in potential capital gains, rather than income (e.g. dividends, interest, or rent), then that person is speculating. It’s the same thing that drove the housing bubble, the tech bubble, etc. It’s the same reason people buy penny stocks or go to the casino and bet on red. You’re absolutely right that Facebook will be a huge win for institutional investors — they’d be foolish not to buy in. But the average folk won’t make a dime, because Facebook has no cashflow/profits to pay out sufficient dividends to justify the price and I doubt they ever will. Buy some Chevron. Or, if you’re really bent on speculating, bet it all on red — you’ll have a better chance of winning.

    • May 9, 2012 at 8:17 am

      I disagree that investing in growth is speculating AND investing in income isn’t. But that is an entirely different conversation.

      I don’t know the future of facebook. It would have minimal impact on our life if it just went away. But I do think (and all commenters seem to have consensus on this) retail investors stand to loose with the “IPO”.

      Thanks for stopping by!

  3. May 8, 2012 at 10:50 pm

    I don’t know if anyone invest for capital gains is equivalent to a gambler. There are some differences, primarily that gambling in most ways is pure luck (with the exception of some games), while the market does offer a number of inefficiencies that can be exploited. I agree however on the ultimate outcome of FB, I certainly wouldn’t buy it until after lockup, assuming I bought individual stocks, which I don’t.

    • May 9, 2012 at 8:20 am

      I sleep well at night even though I missed out on google, apple when my buddy showed me his ipod in 2002 and I thought it was the cat’s meow etc. I don’t know why missing out on facebook would cause me to stay up at night.

      Thanks for stopping by CoM!

  4. May 12, 2012 at 10:07 pm

    Tech stocks scare the crap out of me. I work for a tech company, so I would never in a million years consider buying shares of another tech stock. I even try to keep a minimal number of shares in my own company since so much of my compensation is tied to the stock price anyway.

    I believe in the future of tech as a whole, but not in individual tech companies. There’s a reason you don’t see me working at a start-up. One of my coworkers told me I’m crazy for that though and that if a start-up wants to pay me 150-200+% of my current salary, I should do it for a few years until I can hit FI.

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