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Facebook a disappointment, but not yet a loser

How's that Facebook Inc. stock working out for me? I suppose we should talk about that.

You may recall that as Facebook approached its initial public offering in May, I set aside my previously expressed concerns about its valuation and my doubts about its ability to monetize its user base. The day of its debut, I bought in – literally – at $38.01 (U.S.) for each of 50 shares.

In that late-May column, I suggested the pessimism on Facebook was overdone, and it was a better property than other consumer-Internet stocks with then-higher valuations. "So, I'm not ready for a status update that says my Facebook buy was 'dumb money.' It will be interesting to see what my timeline says in six months."

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Yes, well, ahem. Despite resetting my cost basis by doubling down at $24, I still have an unrealized loss of more than 30 per cent on my Facebook position. Even with Wednesday's jump – occurring, counter-intuitively, on a day when hundreds of millions of Facebook shares became eligible for sale – I'll need a gain of more than 40 per cent just to break even.

Will that ever happen? I'm less sure now. Should I sell? Possibly. Will I sell? Probably not.

First, the outlook for the shares. I have to admit that my investment case disregarded a lot of fundamentals and instead boiled down to "Hot IPOs that boost their offering size aren't supposed to perform this way." I think that's true. And I think there was an outsized amount of schadenfreude and "told-you-sos," much coming from people who didn't have the courage or foresight to step out and explain Facebook's problems before the IPO.

There are a couple of things I underestimated or am having second thoughts about, though.

One is the impact of the expiration of the "lockups" that blocked insider selling immediately after the IPO. I believed that with unprecedented pre-IPO opportunities to sell shares in the private market, combined with the IPO itself, Facebook executives, employees, directors and other early investors would have no real need or desire to sell, particularly absent a post-IPO pop in the share price.

While there has not been an avalanche of selling, and CEO Mark Zuckerberg and many other executives have sold none to little of their stakes, trading volume did spike after the first lockup expired Aug. 16, and the shares have had difficulty staying over $20 since.

Many Facebook insiders purchased their shares for pennies or just a few dollars, so sales at these prices represent significant gains, and are understandable. But they also represent a belief that a big bounce back to the IPO price is not going to happen in the near or even medium term.

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Another issue: I am underwhelmed by the changes Facebook has made in recent months to better monetize its user base. I'm having a hard time imagining the success of "sponsored posts" by individual users. Perhaps the Facebook Exchange advertising platform and the company's mobile initiatives will work; they really, really need to, actually.

This is what gives me comfort: At a market capitalization under $50-billion, buying Facebook today gets you September's 584 million daily active users for less than $100 apiece. It seems quite possible that Facebook can generate a future income stream, over multiple years, of at least $100 per current user.

Still, at this point, I have to admit to having no clue why Facebook stock does what it does. Tuesday night and Wednesday morning, I read the coverage on, which included the headlines "Better Brace Yourself; It's Mega-Lockup Eve" and "The insider stock selling tsunami really gets going at Facebook today."

Instead, the day of the expiration of restrictions on nearly 800 million shares saw a double-digit share-price gain. As The Wall Street Journal noted Wednesday, "few things regarding Facebook's short, six-month history as a public company has gone as expected or without confusion."

Like many investors, one of the things I find hardest is to give up on a loser. When you ride a stock down, it's particularly distasteful. I have some third– and fourth-tier U.S. financial companies I bought in 2007 that are down 80 per cent and will probably never recover. I really should sell, lock in the losses, and use the proceeds to invest in better companies.

I just can't put Facebook in that doghouse yet. I was wrong once, and I don't feel so great now, but there's still enough potential in the company that selling at these levels may make me wrong twice. I'll get back to you in six months to see if I regret these words, too.

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