Listing at $38 a share, late last week Facebook was trading as low as $28.
About 25% of the shares were allocated to retail investors, while the rest went to the big boys – banks, underwriters and asset managers, who were likely allocated their holdings at a significantly lower price.
And luckily for the big boys, they weren’t the target of a media frenzy making them feel out of the loop if they didn’t get a piece of the action.
The relentless spruiking before the first trade was always going to provoke a dangerous atmosphere of greed and fear that all investors should be wary of. Long term Facebook might be fine, but it’s hard to invest when emotion takes over and the supposed experts send conflicting signals.
Take CNBC’s Jim Cramer, who offered the following, “Any investor who can get shares of the Facebook IPO (Initial Public Offering) should purchase as many shares as possible.”
In the aftermath, Cramer said it was a ‘buyer beware’ situation!
Thanks Jim!
Clearly there was an enormous transfer of wealth from the naive to insiders and when you look at Facebook’s value, the fact it hit such a high was complete madness.
Facebook, at its IPO price, was being valued at 100 times earnings.
To put that in perspective, BHP is currently valued around nine times earnings, while the Commonwealth Bank is around eleven times earnings.
Unfortunately, we’ve seen similar IPO hype in Australia.
Back in 2003, Virgin Blue went public with heavy spruiking from Richard Branson.
Big smiles, bikini girls, popping champagne corks and a salivating media all had the public lusting for Virgin Blue shares, so much so, the IPO was ten times oversubscribed.
At the time you had to wonder did those people realise they were buying an airline, traditionally a bad business for shareholders to own.
Virgin’s IPO list price was $2.25, nearly a decade on it trades around 40 cents and hasn’t paid a dividend since 2008.
Always beware of the investing hype.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. Need help with your financial your financial future, we think we’re the best financial adviser in Australia.
