Facebook Investors: Stupid Is As Stupid Does

Congratulations America we have a new class of “victims”, like we needed another such group, comprised of those who bought into the Facebook IPO. This is the retail investor equivalent of AIG in 2008, where both believed they were buying into a market play that simply could not go down.

AIG banked on the historical belief that home values always go up and underwrote billions of dollars of insurance on bundled mortgages. Oops!

Last Friday retail investors bought into their self-delusion that Facebook shares were going to skyrocket despite numerous warnings to the contrary. Oops!

Now a week later things haven’t materialized as these investors expected and they’re looking to place the blame anywhere they can except on their own stupidity. The claims include that the NASDAQ screwed up trades that cost investors billions, that the underwriters withheld negative information about Facebook’s financial outlook and that the company failed to make public internal concerns that they were exposed to deficiencies in monetizing the ever increasing mobile market.

While there may be information that comes to light of some malfeasance, it will not be why these investors got stuffed by the Facebook IPO. They got stuffed because they are stupid, plain and simple.

From a May 2, 2012 article at CNBC:

Besides critical advertisers, Facebook also recently reported it’s first-quarter ad revenue was weaker compared to the previous three months. The company’s ad revenue increased 37 percent from the same period last year, but declined 7.5 percent from the last three months.

From a May 16, 2012 article in the Wall Street Journal:

If investors needed a reminder not to chase Facebook shares, they got three big ones over the past week.

General Motors, a major brand advertiser, plans to stop paying for Facebook ads. Some early investors will sell a lot more shares in the IPO than they previously planned. And the growing use of Facebook on mobile devices could, for the moment, eat away at the company’s revenue.

Though none of these undercut Facebook’s ultimate potential as a major advertising platform, they all suggest that public investors need not rush to buy shares.

From a May 17, 2012 article at CNBC:

Any investor who can buy Facebook shares at the offering price should take the opportunity, said Jim Cramer on CNBC’s “Mad Money.” All things considered, though, he feels “queasy” about the prospects of making money in Facebook by doing anything other than selling it into the aftermarket.

Anybody who invests as little as a dollar without being aware of what CNBC and the Wall Street Journal have to say is simply stupid, and deserves whatever losses they incur.

However these two financial information sources were not alone in their questioning the number of shares being offered and the final valuation of the stock. It is ludicrous to claim that the concerns shared by every professional investor and trader on the street were not widely available, so I say again if you bought into the Facebook IPO you did so ignoring plenty of advice to the contrary.

What is most troubling though is not the fact that there are ignorant investors in the market, nor are the underlying fundamentals of Facebook without merit and in due time the company may well meet or exceed expectations. What’s troubling is the rush to defend these investors from themselves.

From a Los Angeles Times article:

Already grappling with regulatory reviews of its troubled initial public offering, Facebook Inc. and the Wall Street banks that shepherded the deal are now under fire from lawmakers and lawyers.

Two congressional committees said Wednesday that they would conduct preliminary inquiries into the IPO. And attorneys filed two separate lawsuits alleging that average investors were misled in the days before Facebook shares began trading Friday.

Yes with all the challenges facing the country Congress may have to make the time to protect the interests of our newest class of victims, and two lawsuits have already been filed obviously moving toward class-action status so all the victims may be included.

It could only be considered grandstanding for Congress to spend any time involved in this matter, as there are Federal agencies whose purview clearly cover investigations of these types; and frivolous lawsuits seeking settlements from Facebook without any empirical evidence on their side are a regrettable side-effect of the litigious society we have become.

I for one am pleased to hear that Facebook intends to vigorously defend themselves against such actions and further believe the facts are on the company’s side. Did investors lose money on their purchases? Yes but investors lose money every day in the financial markets, and they will continue to do so since the basis of financial market trading is it’s a zero-sum game – somebody wins and somebody loses.

If you were a buyer of the Facebook IPO after all the questions raised by reputable sources then you are not a victim, you’re just stupid, and as Forrest Gump espoused “stupid is as stupid does”.