On Friday Facebook began trading a $38 a share, went up a few dollars momentarily and now has dropped to an emberassing $31.00 in just two days. Often people see a declining share price as a great time to buy, but consider this, I had read that about 10 days before the IPO, the Facebook shares were pegged at $28 and the media frenzy drove the price up… maybe $28 was about right. Facebook is NOT something like RIM in which the shareprice is below estimates of break up value (inventory, buildings, patents…). Facebook has exisitng sales, “good will” and not much else. Also consider the following two articles.
“If you are an investment banker — and let me re-emphasize that, if you are an investment banker — you want IPO shares to go up on their first day, rising in price by at least 10 percent though no more than 20 percent. This shows the IPO is hot, the company is booming, yet the offering wasn’t so underpriced that the founders feel cheated. Such IPOs make investors feel happy and happy investors buy and sell more shares and participate in future IPOs.
If you are an IPO company founder and, even more explicitly, you are Facebook CEO Mark Zuckerberg, you want your share price on the first day to go exactly nowhere, which is what Facebook’s did. That means no money was left on the table and the company got the best possible deal. Zuckerberg didn’t and doesn’t care about investors in this scenario, but then neither does he wish them ill. He just doesn’t give a damn…”
“The hype surrounding Facebook (FB) continued on the second day of trading. After closing only $0.23 above the IPO price of $38 on its debut, the stock closed down $4 dollars, 20 cents or 11 percent to $34.03. The day two drubbing prompted a friend to ask, “The stock’s down 11 percent, so is now the time to jump in?” I quickly responded “ARE YOU INSANE?”
“…The bottom line is that my friend has no business buying individual stocks and chances are, neither do you. Sure, there are fabulous stories about people who plowed money into Apple and are now millionaires, but odds are that’s not going to happen to you. The reason is simple: Research shows that even professional stock pickers have a hard time compiling a winning record, when compared to their relevant indexes…
“According to research from Wharton, over the 23 years ending in 2009, actively managed funds trailed their benchmarks by an average of one percentage point a year AND another report from S&P found that most actively managed funds waged a losing battle over the five years through Dec. 31, 2010. If actively managed mutual funds, which are filled with lots of well-paid analysts, can’t beat the indexes, why should we expect that mere mortals like us could?…”