The Blame Game Begins
The recent spate of complaints about Facebook’s unspectacular stock debut includes thousands of investors who were upset FB’s initial public offering (IPO) did not result in a skyrocketing share price, as often happens with popular new stocks.
Many of those who lost money are upset for one or more of the following reasons:
- The stock’s price failed to go up substantially and has fallen sharply in the days since the IPO.
- The IPO price, in their opinion, was set too high and, as a result, there was no room for a substantial increase.
- The stock’s price was changed only two days before the shares were to begin trading and was raised substantially.
- Orders were botched on the NASDAQ stock market and some trades were mispriced.
- The stock’s underwriter, Morgan Stanley — the company which brought the stock to market — failed to fully disclose an analyst’s report prior to the IPO which reflected negatively on FB.
Should we have sympathy for these investors who, in reality or on paper, lost money on their investments? The answer is a resounding, “No.”
When anyone buys a stock, they know they are taking a chance. Most of the complainers simply are upset the stock didn’t go up so they could either sell right away and make a quick profit or hold on for what they hoped would be an upwardly mobile ride.
Most investors knew the fundamentals of the offering made no sense — not only at the IPO price of $38 per share but even at a price equal to half that or less. At the minimum, they were depending on “The Greater Fool Theory” to save them. This approach occurs when an investor purchases an overpriced stock but still makes a profit because they are able to find someone else equally or even more gullible. The real estate industry had an identical experience when home prices were skyrocketing several years ago. People bought overpriced properties on the assumption they always would be able to sell them at a higher price to someone else.
Investors knew FB was priced at more than 80 times its earnings for the previous year. According to the Associated Press, this was 400% higher than the average for stocks in Standard & Poor’s 500 index. In fact, any time a price-earnings ratio exceeds 40, an investor usually has reason to be cautious.
Investors also knew they were buying a company’s stock which is in an extraordinarily competitive and fast-changing environment. Although FB dominates its field and is closing on one billion users, everyone in the high technology world knows a competitor could come onto the scene and preempt FB’s seemingly insurmountable lead. Just look at what happened to MySpace.
The reality is Morgan Stanley priced the stock exactly at what the market would bear — maximizing its value to the company (and to those smart enough to be sellers rather than buyers on opening day).
There also is no guarantee a new stock will go up after its opening. Many stocks tank or slide laterally. For investors to believe they should be guaranteed a “pop,” although desirable and understandable, is unreasonable.
Investors who are able to get shares prior to the initial trading of a stock (most members of the public are forced to wait until the stock trades before they can buy it) always want an initially low share price so they can lock in quick gains. If a stock is priced too low, however, the issuing company gets far less for its stock than it could.
This makes little sense for a company going public especially if it is raising money for expansion or to pay off debt because it means it is giving up a greater percentage of the company than it needed to offer. A stock which moves relatively little on opening day usually is considered to have been “priced right” from this perspective. That is why FB was priced correctly as far as the company was concerned.
And although Morgan Stanley’s possible failure to make a full disclosure of the negative report to the public was inexcusable, if true, there likely wasn’t any significant new information in the report compared to what investors already knew — i.e., FB’s numbers were poor. That is, everyone knew the offering price was not justified by the company’s fundamentals (e.g., revenues and profits). They knew the stock was grossly overpriced based on any actual revenue and profit numbers.
And anyone paying attention to FB is aware millions of its users are unhappy with its switch to the new “Timeline” format. Others, who have even limited understanding of technology, see opportunities for competitors who could create a more flexible product — and move away from the stifling rigidity which typifies FB’s graphical interface design. In addition, many are aware there are even more potentially unpopular changes planned by FB which will be imposed on its users in the future. All this could create opportunities for competitors to FB.
The truth is the complaining stock purchasers are crybabies. They want to be guaranteed a profit, even if it means selling a stock to an even less perceptive or intelligent buyer. Rather than admit they were greedy and wanted “in” on what they thought would be a hot deal, they find it necessary to blame someone else.
And, given that this is America, where no issue can go unlitigated, many shareholders will turn to lawyers in an effort to avoid personal responsibility and, instead, blame FB, its founder (Mark Zuckerberg), Morgan Stanley, and anyone else they can accuse. Sadly, the reality is buying FB was a bad decision for most people and, had they analyzed the investment dispassionately, they would have not put in their buy orders. That was and is why I am not a FB shareholder.
Aaron Harber "Unplugged" 