Did you get burned by Facebook, thinking that getting a few shares of Wall Street’s next sure thing would make you big bucks, as some TV prognosticators insisted?
If the answer is yes, or if you’d like to avoid stepping in similar steaming messes of you-know-what in the future, I encourage you to remember that through every disaster in life, financial or otherwise, there are lessons to be learned.
Facebook, now down 31% from its $38 offering price, qualifies as such a disaster.
So here are five tips for avoiding the next flaming IPO mess:
1. Accept That You Are a Nobody
In late November, I made the following point about the individual investor’s place in the financial landscape (see: Why Wall Street Needs the Serenity Prayer):
I’m just pointing out that if, as an individual investor, you haven’t known that the deck’s been stacked against you all along, then you just haven’t been paying attention.
As we now know, the bigwigs at Facebook tipped off the IPO underwriters that the second quarter wasn’t shaping up as well as expected, a revelation that was passed on to only a select few big institutional clients.
Now why didn’t everyone get the bad news? Simple – because in most businesses, big customers get treated better than small customers.
Unless you are doing huge, huge business with your broker, the firm just doesn’t care about you all that much.
So who gets the full-spa treatment at a big investment bank like Morgan Stanley?
Fidelity.
SAC Capital.
PIMCO.
Not you.
Get over it – this is just the way the world works.
In terms of money, I’m a nobody, and I hope that accepting my place in the world puts me on the track toward being a somebody.
2. Think Like Groucho Marx
Groucho Marx said: "I don’t care to belong to any club that will have me as a member."
As an individual investor, that’s the attitude you should take when Wall Street cuddles up and offers to do you a favor – like cut you in on what was supposed to be a red-hot, highly-coveted IPO.
The fact that extra Facebook inventory suddenly became available was a red flag that demand from big clients – a.k.a. the full-spa types – were balking at the deal.
When the big, well-connected run, follow them. Or at least pay attention to what’s going on!
3. Read the Stupid S-1
An S-1 is the SEC’s code name for IPO offering document, which basically provides you with an extensive rundown of the company’s operations and financials.
Now why is Facebook’s revenue growth slowing?
Simple – increased use of mobile apps that don’t generate meaningful revenues for the company.
Anyone who read Facebook’s S-1 would have picked up on this.
Here’s an excerpt from Facebook’s first S-1, filed on February 1, 2012:
Although the substantial majority of our mobile users also access and engage with Facebook on personal computers where we display advertising, our users could decide to increasingly access our products primarily through mobile devices. We do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven.
Now let’s look at the amended S-1 Facebook filed on May 9, 2012:
In March 2012, we began to include sponsored stories in users’ mobile News Feeds. However, we do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven. We believe this increased usage of Facebook on mobile devices has contributed to the recent trend of our daily active users (DAUs) increasing more rapidly than the increase in the number of ads delivered.
So in February, Facebook admitted upfront that it had no meaningful mobile revenues, and in May, it signaled that mobile was a drag on ad-serving activity.
