You probably have heard by now, that on May 18th Facebook (FB) did an initial public offering (IPO) which simply means they sold stock to the public for the first time and listed their shares on an exchange, in this case the nasdaq.
Historically, IPOs are under-priced intentionally so stockbrokers can give their “preferred” customers an immediate “pop” (positive return), very similar to the way casinos will comp rooms and show tickets for their highest rollers. Hence, the success of the IPO is defined by the profit provided to these initial purchasers…that the later purchasers and issuing company don’t make out as well has never seemed to calculate into this perverse and dysfunctional measure of investment success.
I know this first hand. About 12 years ago I was in a meeting taking place in a stock broker’s office down in Atlanta. We were interrupted when this guy needed to take a call from a “preferred customer”. I then over heard him say that he would do this chap a favor by “putting aside” some shares of UPS for him (which was about to go public).
Something just didn’t seem right about that to me. It’s been said that enlightened self-interest makes the world go round; this struck me as unenlightened self-interest.
And that’s how the Facebook IPO made me smile; because it was different.
Of course nasdaq botched the initial trading which was a bit of a surprise given the magnitude of the deal, but ultimately those that were primarily affected were the ones looking for the “POP”, probably that Atlanta stockbroker – and his client - if they are still in business.
Everything seems to happen for a reason.
The traders involved in Facebook weren’t looking to make a long-term investment, rather they were just looking to get the POP – then get out. Calling these traders investors is kind of like calling Donald Trump a legitimate presidential candidate!
William J. Bernstein from the efficient frontier recently said it best:
“Virtually everyone who bought Facebook on that first day was making a one-day, get-rich-quick calculation. It didn’t work out. Too bad”
And to that, I would say…. Amen.
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