Second Thoughts on Facebook’s IPO


The upcoming and much anticipated Facebook stock offering promises to live up to its hype.  Analysts will pontificate, investors will gobble-up as many shares as possible, and the official listing of this Internet giant will mark a significant moment in finance — the most formal acceptance yet of social networking as a mainstay in our markets and economy. It is an exciting time for the Internet, venture capitalists, the technology sector, and business in general. Notably, this event also highlights a major theme in trading that threatens the very existence of portfolios universally. A theme that has been present in the past, and sadly appears to be gaining in momentum despite the lessons we should have learned over the last few years.

Financial markets have, throughout history, proven their ability to humble even the savviest of investors. And, for our part, investors have boldly proven, time and again, the unfortunate resilience of our egos. Recently, despite the great market correction of 2008 and subsequent astonishing bull run commencing in early 2009, investors continue to believe they are smarter than the market itself. That is, those who lost significant money in recent years have recovered — not in dollars, but recovered their confidence and aptitude for greed. This is the theme we speak of, and quite evident in the looming Facebook IPO.

A case for support can be found in many facets of the finance industry. For a specific example, one need only look to the General Motors (GM) initial offering of late 2010 to understand the difficulty in predicting. As the second largest IPO on record, the issuing of new GM stock had enormous subscription and consumed headlines for months on end.  Apparently, we were a particularly depressed investing public hungry for opportunity. Investors worldwide touted the automaker and clamored for shares. Today, almost two years later, GM stock trades below $22 per share — a far cry from its initial price of $33.

Why do we continue to chase returns? Why do we feel so compelled to own GM or Facebook from the IPO? Why are we constantly managing our investments from a transactional perspective? Are we really that assured of a large price spike in the early days of trading? Are we restless from the lack of other opportunities? Or, do we just think we are that damn smart?!

The Facebook IPO is not the savior of your portfolio. It is not the source of a guaranteed return. Nor may it ever make money. In fact, Facebook’s famed founder, Mark Zuckerberg, recently purchased the company Instagram for $1billion — without consulting his board of directors. This is not the management of a top tier organization. Rather, this is a young man still learning about himself, let alone running a publicly traded institution. And, this is an IPO like all other IPOs. It could go down in value. It could exhibit severe volatility or lackluster performance. Simply, it may not be what is best for your portfolio.

If we have learned anything from the past years, let it be that risk and reward go hand in hand; there are no sure things, no holy grail in markets. No IPO is guaranteed to go up. No company is guaranteed to be profitable. And, no investor knows what will happen tomorrow. In fact, about the only thing I am certain of when approaching markets is: greed has no place in a properly managed portfolio. It is past time we learned our lesson and stop allowing investment banks, brokerages, and the Facebooks of the world to make money off our misery. Saying no to the Facebook IPO is not giving up a sure profit — it is the first step in properly managing your investments using anything but emotion.

Jonathan Citrin is founder and CEO of CitrinGroup, an investment advisory firm in Birmingham, MI. He is an adjunct faculty of finance in the School of Business at Wayne State University, and a national speaker on financial theory.

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