Five Things to Consider Before Buying Facebook Stock

In my meanderings around the ‘net these days, I’ll admit to being a little disappointed in the Facebook fervor I see. Oh, sure, if you’re a Facebook employee or relevant Investment Banker, you’re on Cloud 9 and not coming down for a while, I completely get that. But, if you’re not a Facebook insider, this probably just isn’t your party.

Yes, I understand the attraction—Facebook rocks! It’s changed the way we use the Internet. You can’t imagine ever not using it, and this is a once in a lifetime opportunity to buy into something you know and love. And some well-intentioned person somehow convinced the investing public that we should buy shares in companies we understand. Companies we love. It’s a nice thought, but I call foul.

As for buying shares of Facebook, I say “Go for it!” if you can get IPO shares at the institutional price. On average, IPOs close their first day 10-15% above the IPO price. So, while you won’t get any guarantees, you’ll get good odds.

Buying post-IPO (the opportunity relegated to most of us) is a different story. History suggests strongly that buying shares post-IPO is not a winning strategy. Why would you be buying individual shares of stock, anyway? How does that fit with your overall investing plan?

Perhaps you’re a day trader, searching day and night for the oracle of market movements—future telling at its best. Day trading is, as Charles Ellis put it, the Loser’s Game. The fact is that the vast majority of individual investors lose money over time.

So if you’re not a day trader, maybe you’re in it with Facebook for the long haul? Facebook is one of the horses you’ve picked to ride to the top.

Consider…

  • Who you’re buying from. If you buy IPO shares, you’re trading with insiders—employees, and long-time investors. Ever heard of the Greater Fool Theory? Why do you want to buy when those people are selling? Of course, they should be selling (to diversify) so the fact that they’re selling isn’t the kiss of death. But Facebook just boosted the number of shares being offered and the price! These folks are chomping at the bit to sell at the IPO price. What makes you confident enough to buy for, say 30% more in the open market? Sure, this can work (see, Google) but it does not consistently (see, Groupon). And this is all before the post-IPO lock-up expires in six months.
  • The stage you’re buying at. Jay Ritter, finance prof at the University of Florida and IPO expert, was recently quoted as saying that the time to buy Facebook was five years ago. I think that’s a bit over the top, but he makes a good point. Facebook could have gone public a year ago, even two years ago. Why now? VCs are famous for holding on to companies until right before their trajectory flattens out.
  • And on that note, isn’t it amazing that almost a billion people are using Facebook? But where will the next billion come from? How will they access Facebook? How appealing will they be to advertisers? No doubt there are a billion rural Chinese dying to become part of the Facebook generation. So what? All companies pick the low hanging fruit first. But few strip the low branches as fast as Facebook has. That is a testament to how good a job they’ve done so far, but don’t ignore the challenges it creates going forward.
  • Who will make things right if Facebook stumbles?We’re in an era when newly-minted entrepreneurs retain control of the multi-billion companies that they create. And that’s a good thing…until it’s not. Facebook has structured itself without a public company’s normal checks and balances. We can all understand Zuckerberg not wanting to be constrained by shareholder demands for profit (he has said publicly that his focus won’t be on profits, but on maintaining the user experience). Steve Jobs didn’t want to be constrained, either. But would Apple have been better off if Jobs had never been forced out, laying the foundation for his eventual return and the Company’s ascent? Meager checks on CEO power can turn stumbles into complete face plants.
  • Politics & Policy. Right now everyone loves Facebook. It’s a great story that highlights the United States’ unique and enviable position. But there are risks. Privacy and monopoly issues could lead a few hundred stodgy old white dudes in DC to become the checks and balances that nobody wants on an innovative high tech company. Does that seem crazy? It probably is, but seasoned investors know that the risks that you really should be worried about are usually the risks you don’t even know you are taking.

An old friend of mine commented on my Facebook page today that folks who aren’t going to buy shares of FB when they’re made available to the public are “unadventurous and risk-averse”. That’s a bold statement to make before the game has even played out. I would refer to people who rely on evidence and statistics to make their investing choices as “prudent and educated”. You can make your own choices, but if you’re a client of this firm, we’d rather spend our time helping you achieve your financial goals than helping you get in the FB game.

As we always say, “Investing should be boring, so LIFE can be exciting!”

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