10th September 2012
Mark Cuban, owner of the Dallas Mavericks basketball team and Facebook investor, argued in a recent blog post that the IPO had been handled "exactly right". He contends that the job of those selling the company's shares was to maximise the amount raised, and it was up to brokers and investors to ensure that they didn't overpay.
The losses that the stock has suffered since are a consequence of the mistakes that the latter groups made in assessing the price. Or as Cuban so eloquently puts it:
"When you sit at the trading terminal you look for the sucker. When you don't see one, it's you. In this case it was me."
The fault, dear Brutus, is not in our stars, But in ourselves
Assuming Cuban is right (which many people do not) what does it say about the culture of investing?
When a potential investor looks at a company there is always a balance to be struck between emotional factors (excitement of buying a brand; potential of returns to come) and technical factors (strength of the balance sheet; market share; price to earnings). Unfortunately the former all too often overtake the latter.
The case of Facebook can therefore be seen as educational. Despite the endless column inches painting a picture of Machiavellian corporate types playing on the innocence of unwitting investors, the warning signs were writ large well before the IPO.
Going back to those trusty technicals: the IPO price valued Facebook at over 100x its current earnings (for reference the benchmark US S&P 500 index is currently trading at 14x 2013 earnings); its revenue growth had been slowing in the years leading up to the float going from 154% in 2010, 88% in 2011 and in Q1 figures were up 45% year-on-year; and the company was struggling to cope with the migration of its users to mobile.
It is undoubtedly a profitable company with revenue of $3.7 billion last year and a user base of almost a billion people logging onto the network each month. These numbers, however, helped create the fog surrounding the IPO, blinding investors from looking at the figures that really mattered.
Not everyone is quite so charitable. In his list of those implicated in the disastrous launch Felix Salmon, the finance blogger at Reuters, does not pull his punches:
"Finally, there are all the investors, including that anonymous hedge-fund manager, who bought into the IPO even though they knew that the valuation was incredibly high, and are now casting around for someone else to blame for their losses. It's impossible to feel any sympathy for these people – especially institutions who had no appetite for stock at more than $32 per share, but put in large orders at $38 anyway just because they were counting on Morgan Stanley to give them a nice opening-day pop. If you pay 100X earnings for a hyped internet stock on its first day of trading and then you lose money, you frankly had it coming."
How can investors avoid becoming snow-blind?
It is impossible to disconnect entirely from your emotions, and there will always be a sufficient number of people of both sides of a trade arguing their case to create confusion. For every Facebook naysayer there was someone willing to tip shares would soar.
Pausing before making that snap decision and consulting trusted sources can undoubtedly help in this process. It is important to confront views that clash with your own even if it reduces the excitement over a prospective investment.
Yet perhaps the most important thing is to take responsibility for your own actions. The lawsuits currently raining down on Facebook executives and the banks that played a part in the deal appear very similar to an inverse of the self-attribution fallacy. By this I mean that while investors are willing to attribute successes to their own decisions, they are unwilling to do the same for losses.
"I think investors must take responsibility for the results of their investment decisions," says Tim Richards, author of The Psi-Fi blog. "In a world characterised by uncertainty it's clearly not possible to get every decision right, but we shouldn't allow that to blind us to our overall performance; which is measurable if we care to make it so.
"Nonetheless, corporations and intermediaries have a responsibility also: to ensure information is presented simply and without confusion. Whether that happened with FB I don't know, but if it didn't then not all responsibility lies with investors."
Those who thought that they were buying into a "sure thing" in Facebook may believe they have good reason to feel aggrieved that their bet failed to pay off. They may even have received poor or insufficient investment advice that prompted them to act.
While these things may provide context to a decision and are deserving of some sympathy, they do not remove the responsibility of an individual. Indeed it is only by accepting this responsibility that investors can learn from their mistakes and hopefully avoid the same pitfalls in the future.
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