Last night I grabbed a slice of pizza on the way home from work, and shortly after I sat down to eat, the two guys beside me started chatting me up. Once they found out that I’m a business reporter, they immediately turned the topic to Facebook’s initial public offering -- as if nothing else in the world mattered.
I’m used to dealing with people asking me for stock advice, simply because of my job. It happens in cabs. On airplanes. At family parties. But I was shocked by how excited one of them got over the IPO. And he even had a business degree.
I tried to be rational, explaining that while Facebook could very well grow to become the next Google, it could also fall off a cliff like Myspace. I also noted that the valuation is practically impossible to peg because no one, and I mean no one, can predict its future growth. But no matter what I said, he had a rebuttal. Look at the historical growth! Everyone’s using it!
This is exactly what Facebook wants. And we, the media, feed right into it. Run a Google News search for ‘Facebook IPO’ and you’ll be terrified by how many things have been written today alone. (And yes, I acknowledge the irony of me writing this.)
If you’re a sophisticated investor, here’s a tip: stay far away from the IPO. The trading volatility is bound to be crazy. You’re just as likely to lose a lot of money as you are to earn big returns.
And if you’re an ordinary retail investor, stay even farther away. Here’s how IPOs work. The retail brokers who are capable of getting their hands on some stock are going to offer it to their biggest clients. By the time most average investors are able to get their hands on it, the big players will have already had time to ride any initial surge and then decide if they want to get out.
Look at LinkedIn’s IPO last summer. Yes, the stock surged from its $45 opening price and closed north of $90 on its very first day of trading. But over the next few weeks it plummeted south of $65. Then it skyrocketed up to $110, and cratered all the way back down to $71.
That type of trading is akin to gambling in a casino. And there’s a good chance Facebook will go through the same cycles. Trying to time that market is next to impossible, so don't try.