26 May 2012

P.S. on Facebook IPO

Following on from the previous post, a few more comments on the Facebook IPO. Bloomberg published a bit of a mixed-bag article titled "Facebook Investor Spending Month's Salary Exposes Hype".

First, just to be perfectly clear, the whole point of articles like this one is to make people such as me feel all smug, superior, and intelligent. They tend to be effective. Ha, what rubes! Good thing I'm too smart to get suckered like that. Let me pause while I pat myself on the back. Give the article a quick read so you, too, can feel good about yourself before we continue.

Here's some excerpts, with my comments.
Ryan Cefalu, who lives with his wife and two kids in Baton Rouge, Louisiana, saw in Facebook Inc. (FB)'s much-anticipated initial public offering a chance to buffer his retirement fund. His expectations fizzled along with the stock within the first minutes of trading. “It’s disheartening to know that things get over-hyped,” Cefalu, a 34-year-old data-systems manager who spent about $4,000 on the stock, said in an interview. “That’s about a 12th of my annual income -- so a month’s salary. I’m trying to do an on-my-own retirement kind of thing.”
So right away we get to feel smart. Here's a guy who puts on just stonkingly large amount of risk for himself into a single stock based on what, we're not sure.  But later we find out:
For Cefalu, whose children are age 12 and 1, the first-day glitches meant more than a bad day of trading: they made him buy twice as many shares as he intended after an order he canceled went through hours later, he said. 
That's bad. Really bad. Should not happen. Can I go back to feeling smart again?

“I thought it would be fun to get in on the initial frenzy,” said Linda Lantz, an online marketer in Granite Bay, California, who bought 100 shares. “Now it makes me think ‘Oh god, should I bail or is it going to come back?’”
Phew! Yes, I can! Thanks, article writers, for this meaningless example carefully included to make me feel better about myself. "Fun" aside, if that wasn't a rhetorical question, the way to answer that is: if you had exactly the amount of cash you'd get from selling right now, would you invest it by buying facebook stock? If the answer is yes, hold it. If the answer is no, sell it and do something else with the money. If the answer is "I don't know", you shouldn't buy anything until you understood risk and stop losses. That said, stop losses don't help if the basic functionality of your order system isn't even working.

Michael McClafferty, a freshman finance major at Michigan State University, saw his “first big investment” turn into a $3,000 loss when he sold the shares at $35.
“I didn’t want to lose more,” McClafferty said. “I didn’t know what to do.”
The 19 year-old student estimates he spent $8,000 more than he wanted to while repeating orders that wouldn’t go through on the first day, and failing to cancel them because of the technical problems.
More technical problems. More detail on exactly what happened here would be really instructive. This is not supposed to happen in an order entry system.

“There’s a lot of questioning about the IPO process in general and a sentiment that the real investor is getting taken by the larger Wall Street,” said Phil Pearlman, executive editor of StockTwits.
That sentiment is solid. Stick with it.

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