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The Life Lessons of the Facebook IPO

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It may sound dry, but as a hobby I study economics and finance, and I am a budding swing trader.  Since I am also the lead developer here at Conversation and work with Facebook (NASDAQ:FB) technology all the time, I find it fitting to discuss something that intersects both realms of my interests.

As the drama continues to unfold, what else could be said about the Facebook IPO fiasco that already hasn’t been put out there?  After watching this story play out over the past few weeks and reading a fair amount on the subject, I have thought about all the behavior we’ve seen and also wondering how this story relates to life.

To the average Facebook user, the world’s most popular social network’s current IPO troubles over the past few weeks haven’t affected their every day experiences with the site.  However the investment community has now cast Facebook, at least for now, as an untouchable stock and a massive mistake because it was’t immediately successful.  This will remain that way, until, of course, it isn’t, as the popularity of particular stocks changes as if the markets were a big high school.

This treatment isn’t unusual as tech IPOs (especially social networks) are often seen as “esoteric” by your average investor.  In the case of Facebook, it’s not that people didn’t know what they did, but more so how they made money that baffled some folks.  It was the same for Google a few years back, LinkedIn, and not to mention all those stocks that boomed and busted during the tech bubble in the late 90′s. Investors often get sucked into the hype around a certain IPO because they think (or they’ve been told by very clever wall street marketers) that they are getting in on the ground floor, until they realize that they’ve fallen victim to something similar to a “pump and dump” scheme.  Oh, yes, many folks got rich off of Facebook’s IPO, but not your average investor.

Facebook-IPO

I say all this to say that the failure of Facebook’s IPO was totally predictable. As someone who has failed many times, I think that this (as most failures do) brings us back to the need to stick to fundamentals, whether in the case of an IPO or not.  I saw this coming a mile away because of some criteria that I like to stick to in the case of any overhyped event (not just in the stock market):

1. Look at the fundamentals.  They always tell the real story.

2. Ask questions, such as:

  • How does this company make money?
  • At how many times earnings is this stock trading?  What about similar businesses?
  • Based on how they make money, how do their growth prospects look?

3. I happen to be a contrarian of some sort, so if I see that everyone is going in one direction, I tend to naturally move towards the opposite.  So I would naturally avoid an IPO in its very early stages.

4. When things are overhyped, they usually “pop” and then “drop”.  Wait for the hoopla to end to find the true value, or if there is any value at all.

5. Be Patient.  In my experience, there is rarely a reason to rush to purchase anything.  Even if you do miss the opportunity, there are always others elsewhere.  With a stock like this, one need only wait a few weeks.

6. Repeat Step 1.

All this foolishness over this IPO will eventually end, and we might find that out of everything Facebook may be a solid company that we might want to own a piece of in the future.  After all the drama clears up, there is still a business at its core, and a visionary CEO leading the company.  Facebook is an innovator in tech, and has made their product popular all around the world so it will be here for the foreseeable future.  Google’s (NASDAQ:GOOG) rise was steady over time.  Apple’s (NASDAQ:AAPL) as well took time.  Be patient and value might be unlocked in Facebook as well after the dust settles.  In my experience, this is how life works!

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