Facebook: Don’t Fish in These Waters

The stock market may be rigged…but not always against you.

Lots of people believe the stock market is a playground for well-connected insiders. This is an old complaint…but it is one that seems to hang particularly thick in the air these days. The Facebook IPO only confirmed people’s suspicions that the game is unfair.

Here was the biggest IPO in the history of US markets. And we learn that big banks and hedge funds got the early dope that Wall Street analysts dropped their estimates for Facebook’s earnings only days before the IPO. The small investors, who were not in the know, were led like pigs to slaughter.

Facebook’s stock is down 29% since it opened at $42.05 per share on May 18. This grim result is causing a lot of howling about the IPO process and those “damn Wall Street banks.”

Of course, you could take the view that investors who fool around with hyped IPOs get what they deserve. My sympathies lean in that direction. If you play with fire, you might get burned. Regardless, I agree with this comment in the Wall Street Journal:

What could have been a model example of the market’s strengths – an eight-year-old company with 900 million users raising billions of dollars from a cross-section of the investing public – ended up as a case study of the power wielded by insiders over outsiders.

In short, Facebook is another black eye for a market that already has a lot of black eyes. In the last dozen years, we’ve suffered through two 50% drops from peak to trough, plus a long list of scandals and shenanigans. Facebook just added to the feelings of disgust and revulsion people already felt toward the stock market.

You can see that revulsion in what people do. They’ve been yanking a lot of money out of the [US] market – something like $1.4 trillion since 2007 and record amounts last year. This year, the outflows continue with gusto.

Some people cite these outflows to say the market can’t or won’t rise. I think that’s a lot of baloney. Michael Santoli of Barron’s had a good column about this over the weekend:

Bears, who claim that broad investment flows are needed to hold up stocks, should note that the US market just doubled in three years with retail selling into the move.

Stocks, as an asset class, then, perhaps are getting a bad rap.

People remember the headline-grabbing stories about certain stocks that “blew up.” But meanwhile, there are many stocks that just keep plodding along. There are many, many companies with good managers and decent businesses that give a fair shake to their owners. On a portfolio basis, such stocks can make the little guy a lot of money over time.

But you have to know where to fish. IPOs, such as Facebook’s, are not an ideal fishing hole.


Chris Mayer
for Markets and Money

From the Archives…

Investing in Gold as World Economies Falter
2012-05-25 – Eric Fry

A Hard Dose of Medicine for the Greek Economy
2012-05-24 – Greg Canavan

Why Sooner or Later in Europe Someone Will Have to Pay
2012-05-23 – Dan Denning

To the Class of 2012
2012-05-22 – Bill Bonner

The Early Stages of a European Bank Run
2012-04-21 – Dan Denning

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, Markets and Money is published in 7 countries with a worldwide readership of almost 1 million people.

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chris kay

Great article. I am always shocked (but not surprised) by articles that blame the retail investor and say tongue-in-cheek “this is how free market works”. Thanks for standing up for the small guy

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