Stocks, Facebook And Greed

Facebook - Naughty Naughty!

Mere days after Facebook shares went live, it finds itself embroiled in a messy legal spat over its tumbling value. In an era where money is scarce, was this always something that was going to turn out to be too good to be true? And how did it come to this when the road is littered with warning signs?

Mere days following the public floatation of Facebook, it has seen close to $2 billion wiped off its value. Sure, it will go down in history – but perhaps sadly not in the way that anyone had hoped or dreamed it would go. How did something that seemed such a sure bet go sour so quickly?

Facebook is a name to fear, and its value seemed a week ago to be made of sheet iron, unassailable. With millions of users, a thriving gaming platform and billions in advertising and cultivated revenue streams, it was a modern fairytale – how the internet could still provide a market force for the world, and be its own force as well. When the Initial Public Offering came about, it seemed an investment worth taking – a no brainer, if you will.

But despite being a new face to the market, Facebook – and many of the forces driving the shares out – fell into already established traps, making basic errors and scuppering any chance of a happy ending. Let’s run through them, shall we?

Facebook shares were a hit and run affair for most investors – to buy as they were dished out, and mere hours later sell them when the value had risen. This is not an uncommon or unheard of approach when you come to IPOs, but with so many people opting for this approach, NASDAQ and many others were simply incapable of processing the demand. Everyone had had the same idea – the same game plan, and when everyone is trying to play off each other, it usually ends badly for them.

Then there was Mark Zuckerberg himself, Facebook’s CEO, who had made it clear for months prior to the floatation that he had the utmost contempt for the company’s IPO, and only chose to  show up to one meeting with potential investors. This attitude – from the public face of the company – can’t have done much to convince or reassure people that Facebook was taking this whole thing seriously, and also showed a serious conflict within Facebook itself – between those running it, and those who made it.

Then there was the pricing. There is a fine art to predicting a fair market valuation, one that tries to marry the complicated relationship between popularity, value and actual net worth. It’s difficult for even the best of companies, but the pricing of Facebook shares seemed to verge on the overly optimistic, whilst trying to parade them around to the world as somehow reasonable, with space for growth. That is the real trick to getting prices right – there has to be enough room left in the valuation to allow the shares to grow, rather than contract. When you buy an antique, you do so hoping that in a year or so, it will have increased in value. But even this is complicated.

The reason this is so complicated is that shares and stocks are a fast-paced market that change rapidly – much like the antiques world, what is worth $500 now in a years time may only be worth $250. If the market is saturated with the product, then the value of the product dwindles – hell, the Nintendo Wii is a commercial representation of this. Second hand Wii consoles now change hands for less than most Wii games, because with 95 million units out there, it just has no actual value. In five or ten years, working Wii units may be worth more – in theory, there will be less working examples. But with the quality of Nintendo products as is, this may take the full decade to even come to fruition. In other words – you’re not buying a Wii as an investment.

Shares are often a long-term thing that people can only see the short-term benefits. Played well, short-term purchases and sales can be hugely profitable, but this is a dangerous game as you need to be sure that there are people out there willing to buy them at the raised cost. Most people will buy shares because they want them to grow, to mature, to be there for their retirement so they can sell them as and when money is needed in their lives. This conflicting set of attitudes makes initial shares hard to quantify, and harder still to shift. This is serious money – and people will be a lot smarter here than those who buy into microtransactions.

Of course, the real problem – and the legally dubious one for which they now find themselves in trouble for – is tipping off market analysts.

There are laws in place for what can and cannot be said in the run-up to a companies IPO – very little, if we’re being honest. But many highly respected and experienced publications in the United States have been reporting that the Chief Financial Officer for Facebook had taken the liberty of tipping off research analysts at the major banks that it is involved with that its upcoming financial and fiscal results would not perform as well as had been predicted, or was being publicised. In a rare show of banking conscience (or perhaps a moment of lucid insanity), these analysts came forward to profess this realisation to potential larger investors. Smaller investors were, of course, not given the whole story – instead having to make do with a brief line about market problems in the mobile industry.

Why is this bad? Because by law, such details should be made public to ALL investors. There is something which is termed “Full Disclosure”, which means that for a new IPO, there can be no secrets, that people need to know and be informed of the pros and cons of an investment in a company. What Facebook are accused of here is selective disclosure – which is highly illegal, as well as immoral and painting the company in a very poor light. Wall Street, after all, is less patient than the millions of Facebook users – it has more to do than try and reign in one company, when there are thousands out there to be managing as well.

I may overuse the term “Too Good To Be True”, but the Facebook IPO was a perfect example. People expected too much from it in too little a space of time. Facebook itself was not forthcoming about its own problems and shortcomings, and it was always grossly overvalued from the off.

However, this will be a good reminder to Facebook that its initial $90 billion valuation will have to be off of more than hype and brand recognition; it will have to be from good, sensible business and playing within the rules set out for the market. The sums have to add up – the investment has to make sense, or people will simply not want to be a part of your special investment club. This is often money that people are banking on for the tuition of their children, or their retirement. If they can’t see the potential, or if they smell a rat, then you’re in for a world of hurt.

This is real money, from real people. And they are far, far less forgiving and tolerant of mistakes than even big banks. Facebook will have to learn that if it is to continue, the little people will matter as much as the big companies – or it will face the consequences of their actions…

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